The Merchants Trust Marks 44 Years of Dividend Growth Amid UK Market Revival

This discipline has been maintained by lead manager Simon Gergel for 20 years. The board highlights the long-term results under his tenure and continues to back the process. You are buying a philosophy as much as a portfolio.

Positioning shift: a once-in-a-generation mid-cap opportunity

The team has nudged more capital into mid-caps, while remaining predominantly large-cap. Why? The manager calls it a once-in-a-generation set-up, with the mid-cap index now yielding more than large caps – highly unusual and a potential signal of undervaluation. In the short term this positioning has been a headwind versus the index, but the conviction is that value lies here.

Top holdings and sector mix

The portfolio is broad, with finance, energy, healthcare and consumer names well represented. Top positions include Lloyds Banking Group (6.2%), GSK (4.5%), Rio Tinto (3.7%), British American Tobacco (3.6%), Shell (3.5%), and Barclays (3.0%). There is also exposure to utilities such as National Grid (2.8%) and SSE (2.5%), and insurers like Legal & General (2.9%).

Two holdings, Dowlais and Assura, were taken over during the year, underlining the appeal of UK-listed assets to buyers and the potential for value to be realised.

Discount control, options and gearing: the toolkit in action

After years of share issuance, the trust bought back 792,017 shares for £4.4 million as the average discount widened to 5.7%. The year-end discount of 5.4% compares favourably with peers and offers potential for additional returns if sentiment improves.

Gearing remains a core lever, using long-dated fixed-rate debt. This can enhance income and returns when markets are favourable, but it will magnify downside in weak periods. The trust also writes call options; at year-end, positions were valued at £668,000 with 2.6% underlying exposure.

Macro backdrop: UK market revival with room to run

The UK market bounced hard, returning 21.1% over the year as global investors rotated away from a narrow set of US tech winners. Management argues the valuation gap versus the US remains wide, even after the rebound. Reforms to London’s listing rules and a push to widen retail participation could be incremental tailwinds.

Risks and what happens next

• Post year-end wobble – NAV fell 7.9% by 30 March 2026 amid Middle East tensions and higher volatility.
• Principal risks – the board highlights geopolitical and climate risks, plus the usual investment strategy and performance risks.
• Style risk – a value tilt and increased mid-cap exposure may underperform if momentum-led growth leadership resumes.

My take: the good, the less good, and the practical

What looks positive

• Income backbone – 29.5p, fully covered, with 44 years of increases and 20.3p per share in reserves.
• Compelling valuations – an explicit mid-cap opportunity at elevated yields is a classic hunting ground for this strategy.
• Discount support – active buybacks and a 5.4% year-end discount can help future returns if sentiment keeps improving.

Where to be cautious

• Benchmark lag – in a market led by a few hot sectors, sticking to value can be painful versus the index.
• Gearing cuts both ways – borrowings of £116.8 million amplify moves, good and bad.
• Event risk – geopolitics and any UK growth disappointments could keep the discount wide.

Who might consider Merchants Trust now

If you want UK equity income with a disciplined value lens, Merchants is doing what it says on the tin: prioritising a high, growing and covered dividend while fishing in unfashionable waters. You must be comfortable with a UK-heavy portfolio, a value style that can be out of favour, and the use of gearing. The current discount may be an entry point for long-term investors who buy the UK recovery thesis.

Dates to diarise

• Ex-dividend date for the final dividend: 16 April 2026
• Record date: 17 April 2026
• DRIP election deadline: 5 May 2026
• Payment date: 27 May 2026
• AGM: 19 May 2026 at 12 noon, hybrid format

Bottom line

Merchants Trust has turned in strong absolute returns, a higher NAV and another year of dividend growth. Relative underperformance is the price of sticking to value during a momentum-led rally, but the manager is leaning into what he believes is a rare mid-cap opportunity. For income-focused investors backing a continued UK revival, this update is encouraging – with the usual reminder that volatility, and gearing, cut both ways.