My three favourite VCTs for income seekers
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
With above average levels of income hard to find, and the new dividend tax about to kick in reducing income for any investor in receipt of more than £25,250 in dividends, what options have investors got for higher income, that isn't subject to the new tax?
The answer might be fairly simple, Venture Capital Trusts, or VCTs as they are commonly known. I won't go into the full tax details here, but there is a generous 30% upfront tax rebate, and dividends paid are tax free in the hands of any investor.
The downside is the higher level of fees VCTs charge.
As a reminder, VCTs invest in small and growing companies, not normally the obvious place to seek a reliable income stream. However, VCT managers are a canny bunch and after much cajoling many years ago suddenly realised a reliable, consistent dividend stream was what investors wanted. Many deals to buy into these small companies have often been structured to pay a healthy yield to the VCT, crucially without compromising the growth prospects.
VCT investing, like any investing, is about spreading risk and diversifying your assets. VCT deals tend to be unique and not shared among managers therefore having a broad spread of VCTs helps ensure diversification and doesn't leave a high reliance in a few sectors or companies.
Downing One VCT (DDV1) - dividend yield of 4% targeted
This long-standing £86 million VCT is well diversified with over 80 holdings. The mix of investments is fairly unique with a mix of AIM listed companies and unquoted ones. The AIM companies account for about 40% of the portfolio and are managed by the highly talented Judith Mackenzie; they are there to provide a growth kicker. The balance is invested in asset-backed businesses with deals often structured to provide steady, modest growth and regular income.
Proven VCT (PVN) - targeted dividend of 5% of NAV
Although badged a 'generalist', the VCT manager, Beringea, is well known for investments into digital media. Its focus has always been on earlier stage growth opportunities and as such the recent VCT rule changes on Management Buy-Outs should have little impact on the approach. A strong team led by CIO Karen McCormick is adept at managing exciting earlier stage investments. This VCT is £65 million in size and has over 30 investments. Recently this VCT sold its stake in boutique jeweller Monica Vinader for a 12x multiple.
Maven Income and Growth 3 (MIG3) dividend yield of 6.7%
I would buy this VCT in the secondary market, without the upfront tax breaks as the discount to NAV is currently an attractive 10%. Investors still receive tax free dividends. Bill Nixon is lead manager on this VCT. He has spent the last 15 years building an excellent reputation in VCT management. Based in Glasgow, but with a nationwide presence, Maven has specialisms in many areas, but one thing they don't like doing is overpaying. Many deals are structured so that income is a priority, however not at the expense of capital growth, evidenced by a long line of profitable exits. There are 47 companies in the £38 million portfolio today with a wide range of companies from insurance to scientific instruments to energy services. Read more on buying second-hand VCT shares.