A key feature of these schemes is the ease with which regular investment can be made.
It is self-evident that regular investment can help smooth stockmarket volatility with fewer shares bought when the investment trust price is high but more shares acquired when the price is low.
However, less well-known are the mechanics of pound-cost-averaging whereby the average price paid for the shares via regular investment is arithmetically lower than the average market price over the period.
In the (theoretical) illustration below, £50 per month is invested. For the purposes of this example, charges are ignored and a lot of market volatility is packed into six months.
The average share price is 90p over the period. The actual average cost of the shares bought on a monthly basis over the period is 85.9p, a saving of 4.5 per cent on the average market price.
| At end: |
Share price (pence per share) |
No. of shares bought for £50 |
| January | 100 | 50 |
| February | 80 | 62 |
| March | 60 | 83 |
| April | 75 | 66 |
| May | 105 | 47 |
| June | 120 | 41 |
| Average price: 90p | Total number of shares: 349 | |
| Actual cost per share: 85.95p | ||
| £50x6 = £300/349 shares |
However, it is important to note that if the market had risen over the holding period, it would be better to have been fully invested from day one, despite the inherent difficulties in the effective timing of lump-sum investments.
Investment trust companies in general have an enviable track record of dividend increases, some having increased their annual dividends for over 40 consecutive years.
Moreover, in contrast to other collective investment vehicles, they can retain up to 15 per cent of each financial year’s income from the underlying investments and transfer this to their revenue reserves. These reserves may be built up in good years and used to boost dividends paid to shareholders in poorer years, in effect enabling a certain smoothing out of dividend payments over time.
History has shown that over the long-term, it is the power of reinvested dividends which drives the returns from equity investment. The value of compounded growth on such income can be dramatic as shown in the illustration below:
£100 invested in UK equities (FTSE All-Share Index) at the end of 1899 would have been worth the following amounts at the end of 2008:
| Nominal Money terms £ | Real terms (adjusted for inflation) £ | |
| With gross dividend income reinvested | 1,152,944 | 17,571 |
| Dividend income not reinvested | 9,129 | 139 |
Prior to the introduction of the ITSS, reinvesting dividends could be fiddly and costly and many investors chose to take dividend income as cash, thus losing out on growth potential. ITSS made dividend reinvestment easy. Indeed, it is the default option with most schemes and often free of charge (other than mandatory stamp duty).
In the current climate of historically low interest rates (the current base rate of 0.5 per cent being the lowest nominal rate since the creation of the Bank of England in 1694) with income much harder to achieve than ever before, investment trusts may be worth due consideration.
The key benefits of good dividend performance and ease of dividend reinvestment through their schemes are of particular relevance.
Sherry-Ann Sweeting is marketing maanger SIT Savings Ltd. All views are her own.