Increased dividends for 29 consecutive years: Schroder Income Growth

Schroder Income Growth (SCF) aims to deliver real income growth—outpacing inflation—alongside a strong total return competitive with the FTSE All-Share Index. Lead manager Sue Noffke, at the helm since 2011, focusses on UK-listed companies with strong fundamentals, resilient cash flows, and sustainable dividends, maintaining a diversified Portfolio across sectors.

Rather than simply chasing the highest yielders, which can often take unsustainable risks to maintain payouts, Sue blends dependable income generators with select high-yielders and lower-yielding stocks that offer greater capital and dividend growth potential. She also actively seeks opportunities across the UK market, combining established large-caps with carefully selected mid-cap stocks, which help diversify the portfolio providing exposure to varied drivers of income and capital growth.

This disciplined approach, supported by the trust’s historically healthy revenue reserves, has helped SCF navigate market downturns and sustainDividend growth through market crises, including COVID-19. Notably, 2024 marked the trust’s 29th consecutive annual dividend increase, cementing its AIC Dividend Hero Status. Additionally, SCF’s current 4.9% dividend yield sits above both the market and the average yield of peers in the UK equity income sector.

Despite broader economic headwinds – slow growth, stubborn inflation, higher-for-longer interest rates to name a few—UK equities have delivered positive returns over the past 12 months. Sue’s disciplined, style-agnostic approach—focussed on stock fundamentals, cutting through top-down market noise, and avoiding rigid adherence to value or growth investment styles—has helped capitalise on this strength. Strong stock selection, particularly in financials, and positive gearing contribution (net of costs) have driven absolute gains, though performance has slipped slightly behind the index on a relative basis.

SCF currently trades at a 10.4%Discount – wider than both its five-year average and the sector’s—a possible disconnect, given SCF’s long-term track record, presenting investors a potentially attractive entry point.

We believe the UK market, despite ongoing challenges—from budget concerns and stubborn inflation to geopolitical tensions—presents an intriguing opportunity for investors. A lot of these issues are priced into valuations and with UK equities currently trading cheaply versus historic levels, with an unusually widespread between the UK’s most and least expensive stocks, but also relative to global markets, these market dislocations have created attractive entry points for active stock pickers. Moreover, we think many companies—particularly mid-caps—appear undervalued not necessarily due to weak fundamentals but rather prolonged macroeconomic pressures. The key is identifying undervalued opportunities with genuine upside potential.

Among UK equity income options, SCF could be a compelling proposition. Supported by Schroders’ extensive resources, Sue and her team leave no stone unturned in seeking undervalued opportunities, with a particular emphasis on mid-caps. This approach provides differentiated access to lesser-known stocks that offer a mix of yields but superior growth potential compared to large-caps. Whilst this may increase short-term volatility, it has supported long-term outperformance of the FTSE All-Share and contributed to SCF’s near three-decade dividend growth track record.

SCF’s strategy blends lower-yielding stocks with those offering higher, sustainable yields, alongside mispriced structural growth opportunities. This approach, in our view, enhances income potential whilst also supporting long-term capital appreciation.

We think for income-focussed investors, SCF’s consistent dividend growth, disciplined stock selection, and balanced portfolio offer an attractive blend of income and long-term upside, making it a compelling choice for those seeking a differentiated and resilient income with growth potential.