Over the past few years, some investors have profited handsomely from owning shares in Scottish Mortgage Investment Trust (LSE: SMT). While the shares are down 45% over the past 12 months, on a five-year timeframe the price has increased 90%. Not only that, but the trust pays dividends. However, the Scottish Mortgage dividend yield is less than half of one percent. So if I invested £100 in the shares now, I would not even expect 50p in dividends in the coming year.
Why is that – and does it affect my decision as to whether the Edinburgh-based investment trust might make a good addition to my portfolio?
Long history of increases
The first interesting thing to note about Scottish Mortgage when it comes to dividends is that, in some ways, its track record actually sets it apart positively from many other shares.
The company has paid a dividend annually without cutting it for decades. The last reduction was back in the 1930s. Very few other companies have such an unbroken record of dividends. That is no guarantee of what will come next, but it does show that the business has demonstrated a long-term concern for shareholder interests when it comes to distributing surplus funds.
On top of that, the trust has actually been growing its dividend handily in recent times. Last year, for example, the annual dividend went up from 3.42p per share to 3.59p per share. That is an increase of approximately 5%, which I find attractive in percentage terms.
Calculating the Scottish Mortgage dividend yield
But if the dividend has been growing, why is the yield so low?
That is because dividend yield is calculated by looking at the dividend as a percentage of a share’s price. While the five-year share price rise I mentioned above may have increased the value of some investors’ shares, it has had the effect of pushing down the Scottish Mortgage dividend yield.
Indeed, if I had bought the shares a year ago when they were more expensive, my yield would have been even lower than if I purchased them today.
So, does the low yield mean I would not consider adding Scottish Mortgage to my portfolio?
My answer is no, based on my personal investment objectives. The trust’s long dividend record impresses me. But from an income perspective, I feel I can find other high-quality companies offering me a higher yield that they can hopefully keep funding in future.
However, I see Scottish Mortgage as a potential addition to my portfolio more for its growth prospects than the income potential. Of course I would welcome dividends, even if the yield is low. But the main reason I would consider buying Scottish Mortgage shares is because of the growth opportunities I think the firm’s asset managers can spot for the trust. With growth as my objective when buying a share, its dividend yield plays only a small role or none at all when I decide whether to add it to my portfolio.
Despite the risks of a continued slide in tech valuations hurting the share price, I think Scottish Mortgage’s diversified portfolio could offer me exposure to long-term growth opportunities. So I am considering buying its shares for my portfolio, whatever the yield.
The post Why is the Scottish Mortgage dividend yield so small? 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 no position in any of the shares mentioned. 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.