Research from the Association of Investment Companies (AIC) into VCT member dividends suggests that many VCTs have truly come of age when it comes to producing regular, reliable income for the good times and the bad.
The Generalist VCT sector is currently yielding an average of 6.4%, whilst the VCT AIM Quoted sector is yielding an average of 9% and the VCT Specialist: Technology sector is yielding an average of 4.6%. AIC figures also suggest that dividends held up well during the 2008/2009 recession. In 2008, 93% of VCTs paid a dividend, whilst in 2009, 86% of VCTs paid a dividend, and these tended to be in line with previous years.
In addition, the total amount of ordinary dividends paid during the first six months of the tax year to 30 September 2011 is significantly higher than the amount of ordinary dividends paid during the six months of the tax year to 30 September 2010 (GBP73,889 in the six months to 30.09.2011 compared to GBP54,300 in the six months to 30.09.2010). A number of VCTs have distributed the proceeds of investment realisations (see table on page 4).
VCT dividends are tax free. As the VCT sector passes its 16th year, the AIC looked at the VCT sector’s strongest performers over the last ten years (see table on page 4 for list of top performers). During the earlier years many of these VCTs have tended to accumulate realised capital profits, paying out dividends once the VCT is more established in a controlled manner to provide a relatively smooth level of dividends.
The strongest performer over the last ten years is British Smaller Companies VCT, which is up 231% in share price total return terms. It has paid out a total dividend of 43.75p per share since launch, all of which have been over the last six years. The second top performing VCT over ten years, Proven VCT, is up 186% in share price terms over the last ten years and has paid out the highest amount to shareholders by way of dividends – 107.70p per share since launch, all of which have been since 2001.
Patrick Reeve (pictured), Managing Partner, Albion Ventures, and manager of several Albion-managed VCTs, says: “Dividend generation has long been a feature of VCT strategy as it is a core tool in risk reduction – no matter what uncertainties are inherent in your portfolio of VCT investments, once a dividend has been paid no one can take it away again, and so an element of your return has been locked in.
“Tax free income is clearly even more important now than ever, given the unusually high tax and low interest rates. VCTs, along with ISAs, are the only savings vehicles that can achieve this. And above this, investors like their dividend streams to be predictable and reliable, particularly if they’re using VCTs as ‘quasi pensions’.
“VCT dividends are generated from two sources – revenue profits (for instance, from loan stock or dividend income from investee companies), and realised capital gains on the sale of an investment. The latter are more unpredictable, and so one method of ensuring a predictable dividend stream is to maximise the revenue profit generation of a VCT by having as much as possible in interest paying loan stock, while at the same time storing up realised capital profits and paying them out over time in a controlled manner to provide a stable level of dividends.”
Tim Levett, Chairman of NVM Private Equity Limited, Managers of the Northern range of VCTs, says: “Looking at the performance of the top Generalist VCTs over a ten year period, all funds have provided a steadily increasing regular dividend stream. Over the last five years, investors have been receiving regular dividends of at least 5p on a maximum investment net of tax relief of 80p, with capital value maintained and dividends received tax-free.”
David Thorp, Baronsmead VCTs, says: “It is the sale of successful investments in UK growth SME companies that generates the profits from which high and steady dividends can be paid. Many shareholders who invested in 1995 have stayed the course and dividends have been part of the glue over the longer term. Shareholders have told us that VCTs play an important part of their retirement planning.”
Stuart Veale, Managing Partner, Beringea Limited and Manager of Proven VCTs says: “The level of tax-free dividends being paid by VCTs is very attractive compared to the post-tax returns from many other investments. Furthermore, VCT shareholders are able to reinvest the income in additional VCT shares, thereby obtaining further tax relief.”
Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) says: “AIC data on VCT dividends suggests that the sector is really delivering when it comes to producing a regular, reliable income for the good times and the bad. Of course there’s a broad spectrum of strategies and by their nature, VCTs are high risk and should be part of a balanced portfolio. There is lots of information on the AIC website – investors need to do their homework and, where necessary, seek independent financial advice.”
