Revenue reserve

Investment trusts can hold back up to 15% of their dividends to build up a revenue reserve, which they can then draw on to maintain their own dividends in years when company payouts fall.

Many high-profile investment trusts have managed to raise their dividend every year for decades regardless of dividend cuts by companies. The main reason for this is that trusts, unlike open-ended investment funds, don’t have to distribute all the dividends they get each year. They can hold back up to 15% to build up a revenue reserve, which they can then draw on to maintain their own dividends in years when company payouts fall.

This can be useful for investors who prefer a steady income from their funds. You could do a similar thing with your own portfolio, by putting aside 10% or 15% of your dividend income to be drawn on only during market crises. However, avoiding dipping into that requires discipline, while having it out of reach inside an investment trust doesn’t present the same temptation.

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