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All stock market investors face a choice between embracing optimism or settling for pessimism. They can either decide to concentrate on problems, challenges and reasons why the economy and stock market seem likely to struggle, or they can resolve to adopt an upbeat outlook that focuses on the stock market’s growth potential and the catalysts capable of unleashing it.
Given that the stock market has always produced new record highs since its inception, optimists are almost guaranteed to trump pessimists in the long run. Certainly, temporary periods of decline are inherent in markets. But seeking to flip-flop between optimism and pessimism to capitalise on them is, quite simply, impossible to achieve accurately and consistently over an investor’s lifetime.
Therefore, in Questor’s view, stock market investors should look ahead with optimism to the stunning capital gains and vast dividend growth we expect to be offered by the market over the coming years. After all, today’s extremely low valuations suggest it is only a matter of time until the advent of high returns.
For example, the Schroder Income Growth investment trust currently trades at a 13.4pc discount to its net asset value. This is its widest discount in 10 years and greater even than it posted during the depths of the pandemic; it indicates that the fund offers excellent value for money for income-seeking investors. Moreover, the trust’s discount is now significantly greater than when it was added to our Income Portfolio in December 2016.
The trust has an enviable record of reliable dividend growth: shareholder payouts have risen in every year since its inception in 1995. When combined with a low share price, this means the trust yields a relatively generous 5.3pc.
Although the dividend did not rise in the first half of the 2023 financial year, its annualised growth rate has amounted to 3.3pc over the past 15 years. This is 0.6 percentage points above average annual inflation over the same period, which means it has achieved its central aim of producing a positive real-terms rise in income over the long run.
Dividend growth is likely to return in the coming years, since the outlook for the trust’s globally focused holdings is poised to become increasingly upbeat. Although the world economy’s growth rate is expected to fall to 3pc this year from 3.5pc last year, according to the IMF, the current era of high inflation and interest rate rises is coming to an end.
The US Federal Reserve expects interest rates to rise very modestly, if at all, in the short run before falling to about 4pc by the end of 2025. In Britain interest rates are widely forecast to fall to 4.5pc within the next three years as inflation declines to below the Bank of England’s 2pc target. Falling interest rates have the potential to create stronger operating conditions across a variety of industries, which should prompt higher profits, growing dividends and richer stock market valuations.
Many of the trust’s major holdings also have long-term structural growth opportunities. AstraZeneca, for instance, is well placed to benefit from demographic changes such as a growing and ageing global population.
Glencore, the miner, is likely to be a major beneficiary of the world’s push to achieve net zero thanks to its focus on “future facing” commodities, while Unilever is well placed to capitalise on relatively high growth rates in emerging markets.
This should translate into strong dividend growth across what is a relatively concentrated portfolio of 43 holdings. The fund’s gearing ratio of 14pc means that any returns will be magnified relative to those from the wider stock market and, indeed, vis-à-vis many other income-focused investment trusts.
While no income investor would choose share price volatility over stability, ultimately the former is a price worth paying for higher long-term returns in a rising stock market.
Since its addition to our Income Portfolio nearly seven years ago, the Schroder Income Growth trust has suffered a 4.9pc capital loss. However, it has paid dividends amounting to a third of our initial purchase price.
While some investors will highlight its near-term challenges and bemoan the ongoing problems facing the world economy,
Questor retains its upbeat assessment of the trust’s prospects. Its wide discount to net asset value, relatively high gearing and high-quality holdings make it well placed to deliver attractive share price and dividend growth in the long run. Hold.
Questor says: hold
Ticker: SCF
Share price at close: 251p
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