Value- and income-focused Merchants Trust (LON:MRCH) has maintained its AIC ‘Dividend Hero’ status after a strong H1 performance. The trust, which has raised its dividend over 44 consecutive years, beat its benchmark in the six months to July 2026.
Outperforming a volatile market
Despite an ‘unsettled’ political, economic and market backdrop, Merchants delivered a 9.3% net asset value (NAV) total return. The total share price return was 8.4% compared to a 7.9% return for FTSE All-Share index.
However, there was ‘considerable movement beneath the surface’, admitted outgoing chair Colin Clark. ‘Individual sectors and stocks have experienced unusually wide variations in performance, influenced by geopolitical events, changing bond yields, vertiginous shifts in expectations around artificial intelligence, and a continuing preference among investors for companies showing strong short-term earnings momentum.’
While it didn’t escape the market volatility, Merchants used it to good effect, taking profit where valuations rose significantly. The proceeds of these sales were redeployed into new holdings with greater upside potential.
Realising value within the portfolio
Five stocks were sold, with DCC Energy (LON:DCC) having re-rated after receiving a takeover offer and French insurer Scor trading near fair value. The manager also sold Unilever (LON:ULVR) and Magnum (LON:MICC) following the demerger, and PZ Cussons (LON:PZC) after conviction levels fell.
Cash was recycled into a bigger position in Reckitt (LON:RKT), in recognition of its attractive valuation, and a number of new investments. Autotrader (LON:AUTO), Sage (LON:SGE) and Wolters Kluwer were added after heavy selling pushed valuations down and yields up.
Other H1 additions included publisher Bloomsbury (LON:BMY), materials group Breedon (LON:BREE), insurer Chesnara (LON:CSN) travel retailer SSP Group (LON:SSPG).
Maintaining ‘Dividend Hero’ status
Portfolio income rose modestly in H1 to £29.1 million against £28.8 million a year earlier. Some companies reduced their dividends, often in favour of buybacks, while others announced significant increases.
Of particular note was the 30% hike in the interim dividend at Lloyds Bank (LON:LLOY), the biggest income contributor to the trust. Also of note was the near-doubling of the interim dividend at Barclays (LON:BARC), with a significant full-year increase also likely.
In line with its track record of raising its dividend over 44 consecutive years, the trust upped the interim payout by 2.7% to 15p. The manager also flagged that many of this year’s new purchases have ‘exceptional’ records of paying progressive dividends.
Merchants has always taken a slightly contrarian, ‘value’ approach to investing, which history shows pays dividends in the long run. Although its focus is UK large-caps, the trust isn’t a bet on the UK economy because the bulk of corporate earnings comes from overseas.
As we know, the UK market is trading at a substantial discount to international peers meaning there is plenty of value on offer. It also offers a range of high-yielding opportunities which help meet the trust’s focus on income.
Manager Simon Gergel has over 30 years of experience in finding cheap, quality companies with positive fundamental drivers. Added to that, a reliable income stream makes the trust one of the AIC’s longest-serving ‘Dividend Heroes’.
