Scottish Mortgage is a passive income superstar! Who knew?

Scottish Mortgage Investment Trust(LSE: SMT) is one of the last names I’d associate with passive income. So I was surprised to discover its impressive pedigree.

Arguably, the most popular investment trust of all, Scottish Mortgage is known for growth. Star manager James Anderson turned it into a tech-focused juggernaut with big stakes in names such as Tesla, Amazon and Alibaba, before he retired. It became wildly popular during the pandemic boom, but when tech fell out of favour in 2022, Scottish Mortgage paid the price, crashing 50%.

It’s bounced back nicely. The share price is up 17% over one year and almost 60% over two. While it’s still some way off its former highs, that’s an encouraging recovery.

I bought it just as it started to revive in 2023, and never once considered it a source of second income. I should have.

Dividend keeps climbing

Scottish Mortgage has increased its dividend for 42 consecutive years. That’s remarkable. The board plans to continue this run by lifting the 2025 payout 3.3% from 4.24p to 4.38p per share.

Over the past 15 years, the trust has grown its shareholder payout at an average annual compound rate of 4.51%. The reason its yield is so low — just 0.43% — is because the share price has climbed over time.

Someone who invested £10,000 back in July 2010 at 117p a share would have picked up 8,547 shares. In that first year, they’d have collected a dividend of 2.26p per share, worth £193. Today’s 4.38p dividend would give them £374. In practice, they’d have got a lot more, assuming they’d reinvested every payout in betwen, to pick up more stock.

A solid long-term performer

On 22 May, Scottish Mortgage published full-year results showing a net asset value total return of 11.2% for the year to 31 March, well ahead of the FTSE All-World Index at 5.5%. The share price return was a more modest 6%, due to the discount to net asset value widening from 4.5% to 9%. Ongoing charges remain low at just 0.31%

Management highlighted the benefits of holding companies exposed to big structural shifts, especially in artificial intelligence (AI) and semiconductors. The trust also spent £2bn on share buybacks since March 2024 as part of its battle to close the discount.

The trust remains risky. It has extensive private holdings. Northvolt was a substantial one, but had to be written off when the Swedish battery maker filed for bankruptcy in March.

Scottish Mortgage also has a large stake in Elon Musk’s SpaceX, which will either be a triumph or source of trouble. The trust’s share price remains volatile and exposed to swings in sentiment, especially around growth and tech stocks.

A tempting discount

This is still very much a growth play. The income story’s a bonus, not the main event. But with a history of hiking dividends since 1983 (the year the CD player was invented), the income should play out nicely in total returns over time.

It won’t suit everyone. Volatility’s a given. But I think those with a long investment horizon should still consider buying. It offers access to some of the world’s most exciting private and public companies without having to pick individual winners. And if the dividend keeps growing, even better. Scottish Mortgage is a passive income superstar indeed. I’d never have guessed.

The post Scottish Mortgage is a passive income superstar! Who knew? appeared first on The Motley Fool UK.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harvey Jones has positions in Scottish Mortgage Investment Trust Plc. The Motley Fool UK has recommended Amazon 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.