How secure is the Scottish Mortgage dividend?

Not many companies maintain annual payouts for decades. But Scottish Mortgage Investment Trust (LSE: SMT) is over. The last time Scottish Mortgage’s dividend was cut, in fact, was in the 1930s after the Great Depression.

The record certainly caught my attention as an investor. But past performance should not be a guide to what will happen in the future. After all, shell It hasn’t cut its dividend since the 1940s but it did in 2020.

Is a dividend from Scottish Mortgage possible?

A positive player

There are no guarantees when it comes to dividends. But I feel confident that the Edinbugh-based investment trust can keep the payouts. Indeed I expect to increase the number every year, in keeping with new practices. In recent years, the subsequent dividend payment of 5.0% per share is 3.6%. At this year’s interim stage, payments increased by 5.3%.

These stocks are held by many investors more for capital growth than income potential. Although Scottish Mortgage’s share price has fallen by 17% over the past year, Scottish Mortgage’s share price has still risen by more than 50% over the past five years.

But faith also acknowledges”the importance of some shareholders providing a predictable and increasing level of dividend income to help plan their income needs“.

Dividend outlook

For dividends to continue to be paid, money is needed.

But many of Scottish Mortgage’s positions are growth stocks that do not distribute income to shareholders. The five largest holdings are Modern, ASML, Tesla, Free market and Illumina. No one pays dividends now.

Indeed, the company’s profit (from dividends received) last year was less than a third of what it paid to its own shareholders.

However, as an investment trust, it does not need to rely on the income it receives to pay dividends. You can also finance shareholder payments from what is known as realized capital reserves.

In other words, it can be dipped into the proceeds of the sale of shares to help fund payouts. As the company notes, the size of the long-term gains due to the growth in share prices in holdings such as Tesla means that the amount used to support dividends is “relatively immaterial“.

low yield

Just looking at earnings, the dividend is clearly not safe. But taking into account the trust’s ability to use the realized income to help fund payment, I think it can be maintained or increased for the coming year.

The current dividend yield is only 0.5%. That in itself is not very attractive to me. But I see long-term potential for a lot of income. I also think the stock price can increase, if the proven approach to investing in early stage growth companies continues to work well. That works both ways, though. A worse economy could hurt growth stock valuations. This is likely to continue to drag down Scottish Mortgage’s share price, as we have seen over the past 12 months.

But if I had the money to invest today, I would add Scottish Mortgage to my portfolio.