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How secure is the Scottish Mortgage dividend?

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December

Not many companies have maintained their payouts annually for decades. But Scottish Mortgage Investment Trust (LSE: SMT) has done just that. The last time the Scottish Mortgage dividend was cut, in fact, was in the 1930s following the Great Depression.

That sort of record certainly catches my attention as an investor. But past performance is not necessarily a guide to what will happen in future. After all, Shell had not cut its dividend since the 1940s but did so in 2020.

So can the Scottish Mortgage dividend be maintained?

Positive performer

There are never any guarantees when it comes to dividends. But I feel fairly confident that the Edinbugh-based investment trust can maintain its payout. Indeed I expect it to keep increasing the yearly amount, in line with its recent practice. Last year, the annual dividend rose 5.0% to 3.6p per share. At the interim stage this year, the payout grew 5.3%.

The shares are held by many investors more for their capital growth than income potential. Although the Scottish Mortgage share price has fallen by 17% over the past year, it has still grown by over 50% in the past five years.

But the trust also recognises “the importance to some shareholders of providing a predictable and growing level of dividend income to help plan their income needs”.

Dividend outlook

For dividends to continue being paid takes money.

But many of Scottish Mortgage’s positions are growth shares that do not distribute any of their earnings to shareholders. Its five biggest holdings are Moderna, ASML, Tesla, MercadoLibre and Illumina.  None currently pays a dividend.

Inded, the company’s revenues (from dividends it received) last year were under a third of what it paid out to its own shareholders.

As an investment trust, however, it does not need to rely on income received to pay out dividends. It can also fund shareholder payouts from what are known as realised capital reserves.

In other words, it can dip into the proceeds of share sales to help fund payouts. As the company noted, the scale of its long-term proceeds thanks to share price growth at holdings such as Tesla means that the amount used to support dividends is “relatively immaterial”.

Low yield

Looking only at earnings, the dividend is clearly not secure. But taking into account the trust’s ability to use realised gains to help fund the payout, I think it could be maintained or increased for years to come.

The current dividend yield is just 0.5%. That on its own is not very attractive to me. But I see long-term potential for a growing income. I also think the share price could increase, if the trust’s proven approach to investing in early stage growth companies continues to work well. That works both ways, though. A worsening economy could hurt valuations of growth shares. That could keep dragging down the Scottish Mortgage share price in its wake, as we have seen over the past 12 months.

Yet if I had spare cash to invest today, I would add Scottish Mortgage to my portfolio.

The post How secure is the Scottish Mortgage dividend? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML, MercadoLibre, and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.