This trust's dividend has beaten inflation for a decade – but its share price needs a boost

Telegraph

18-07-2025

Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest.
The FTSE 100 is in the midst of a record-breaking year. After posting desperately poor returns for what felt like an eternity, it has made several new all-time highs during 2025.
Indeed, it appears as though investors are finally beginning to realise that a globally-focused index that trades at a discount to its peers is likely to be a worthwhile prospect.
Of course, the chances of the FTSE 100 posting further record highs may seem somewhat distant amid an ongoing global trade war that could yet heat up after an extended pause.
This may prompt many investors, particularly those seeking a reliable income, to determine that now is an opportune moment to exit UK large-cap shares while they trade at more generous price levels vis-à-vis their recent past.
In Questor's view, though, long-term income investors are being more than fully compensated for the heightened risk of elevated volatility over the coming months. The index, for example, offers a dividend yield of 3.4pc – this is 2.8 times that of the S&P 500.
The FTSE 100 also remains cheap relative to other major large-cap indices, with many of its members offering significant long-term capital growth potential, as well as dividend growth, amid the current era of monetary policy easing that is taking place across several developed economies.
Therefore, sticking with UK-focused investment trusts such as Schroder Income Growth could prove to be a sound long-term move. It has an excellent track record of dividend growth, with shareholder payouts having risen in each of the past 29 years.
Given the scale and variety of geopolitical challenges experienced in that time, it seems to be well versed in overcoming periods of heightened uncertainty.
The company's dividends, furthermore, have increased at an annualised rate of 11.3pc over the past decade. This is 50 basis points ahead of annual inflation over the same period, thereby meaning the trust has met its aim to provide positive real-terms dividend growth. And with a dividend yield of 8pc, it offers a substantially higher income return than the FTSE 100 at present.
The company also has a solid long-term track record of capital growth, thereby meeting the other part of its aim. Its net asset value (Nav) per share has risen at an annualised rate of 11.3pc over the past five years.
This is 50 basis points ahead of the FTSE All-Share index, which is the company's benchmark. Given that its shares currently trade at an 8pc discount to Nav, they appear to offer good value for money and scope for further capital gains over the long run.
Of course, a gearing ratio of around 11pc means the trust's share price is likely to be relatively volatile, especially given the aforementioned elevated geopolitical risks.
However, given Questor is highly optimistic about the stock market's long-term growth potential, leverage is likely to prove beneficial to overall returns in the coming years.
A glance at the weightings of the trust's major holdings may also suggest relatively high share price volatility lies ahead. After all, its five largest positions account for 28pc of total assets, with its portfolio amounting to a relatively limited 45 holdings.
However, given the FTSE 100's five largest members account for 31pc of its market capitalisation, this column is not overly concerned about the trust's concentration risk.
Moreover, well-known FTSE 100 stocks that are fundamentally sound dominate its major holdings. They include AstraZeneca, Shell and National Grid, with the trust adopting a bottom-up approach that seeks to identify market mispricings when selecting stocks.
Since being added to our income portfolio all the way back in December 2016, Schroder Income Growth has produced a capital gain of 18pc.
Although this is four percentage points behind the FTSE 100's rise over the same period, which is undoubtedly disappointing, there is scope for index-beating performance as its current discount to Nav likely narrows, the benefits from sizeable gearing in a rising market become more apparent and its focus on fundamentally sound firms catalyses its performance.
As well as offering capital return potential, the trust remains a worthwhile income purchase. Its relatively high yield, potential to deliver inflation-beating dividend growth and excellent track record of consistently rising shareholder payouts more than compensate investors for what could yet prove to be a highly volatile and uncertain second half of 2025.
Questor says: buy
Ticker: SCF
Share price at close: £3.12