Results analysis from Kepler Trust Intelligence

Schroder Income Growth (SCF)

13/11/2025

Results analysis from Kepler Trust Intelligence

Schroder Income Growth (SCF) has reported NAV and share price total returns of 9.6% and 12.9% respectively for the year to 31/08/2025, against the FTSE All-Share's 12.6%. Performance was supported by an overweight to financials, where banks and insurers delivered higher dividends and buybacks, lifting share prices. However, above-market exposure to small- and mid-caps and not holding a few strong performers, such as Rolls-Royce and British American Tobacco, weighed on relative returns.

During the financial year, the board took several steps to bolster shareholder returns, including a reduction in the management fee from 0.45% to 0.40%, effective from 01/09/2025, now charged on the lower of market capitalisation or NAV, removal of a secretarial and admin fee, and tighter discount management.

Kepler View

Schroder Income Growth (SCF) delivered another year of dividend progress, with its total dividend rising 3.5%, supported by a 7.8% increase in earnings. This marks 30 consecutive years of dividend growth, with dividends rising at an annualised 4.1%, comfortably ahead of CPI inflation at 2.5%, delivering real dividend growth of 1.6% per annum since launch. Although earnings did not fully cover the dividend, we view positively the board's decision to make all distributable reserves available, providing flexibility to support future payouts and underscoring its commitment to maintaining SCF's strong record of dividend growth. The board has also delivered on its plan to smooth the income, rebalancing payments more evenly across all four dividends so shareholders receive a larger proportion of the total dividend earlier in the year.

Across the market, unfavourable exchange rates and a shift toward share buybacks have been headwinds to UK dividends. Against that backdrop, SCF's growth in both earnings and dividend is encouraging, underpinned by its broad income sources, exposure to businesses buying back shares sustainably and the board's supportive reserve policy. The trust's 4.4% yield stands above the UK market, the Bank of England base rate, and the AIC UK Equity Income sector average. And as interest rates decline, we think this premium yield, combined with a long-term dividend growth record, should become increasingly appealing versus cash or bond alternatives, whilst SCF also offers investors the potential for capital growth.

Whilst a tilt toward smaller companies can increase short-term volatility, it has historically enhanced long-term returns and contributed to SCF's three-decade dividend growth record. Given current mid-cap valuations, their dividend growth and earnings recovery potential, SCF's overweight exposure offers meaningful upside if sentiment improves, whilst also supporting the portfolio's underlying income potential.

At the time of writing, SCF trades at an 8.5% discount, within its five-year average. We think the narrowing over the year reflects several potential drivers: ongoing buyback activity, a premium yield appealing in a falling rate environment, a long-standing dividend growth record and lower management fees. Should performance also improve, notably by re-ratings in the trust's small- and mid-cap holdings, there is potential for the discount to tighten further.

Investors should, however, recognise that uncertainties remain. The upcoming Budget, geopolitical tensions and ongoing tariff discussions could continue to weigh on sentiment and pressure smaller, more domestically oriented companies, potentially affecting earnings, margins and valuations in the near term. Overall, though, we believe SCF offers a well-balanced proposition for investors seeking both income and long-term growth, backed by its proven dividend record and access to Schroders' deep research resources. We think the trust's yield, valuation discipline and mid-cap bias could prove rewarding for patient investors if sentiment towards the UK market improves.

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