The Association of Investment Companies (AIC) has published its annual round-up of ‘next generation’ dividend heroes – the select band of investment trusts that have grown or held steady their dividend payment to shareholders year on year for between 10 and 19 years, as they march hopefully towards the 20-year threshold for full ‘dividend hero’ status.

And it’s cheering to see that The Mercantile Investment Trust (MRC) retains its presence within the 30-strong table, with 12 consecutive years of dividend growth now under its belt¹.

A smoother dividend path

For manager Guy Anderson and The Mercantile board, this ‘next generation’ dividend hero listing reflects the importance the team places on a regular and secure dividend distribution. While dividends are not guaranteed, this approach aims to provide a degree of consistency for investors, including during periods when capital growth is harder to come by.

The structure of investment trusts can support a more consistent approach to dividend growth, which offers an inherent advantage over open-ended funds.

As Annabel Brodie-Smith, communications director at the AIC, explains: “Investment trusts are able to smooth dividends over time, because they can hold back income from their portfolio and use this to boost dividends in leaner years.” In contrast, open-ended funds must pay out all income received from their underlying investee companies each year.

Growth-focused heroes

It’s important to note that while income-oriented investors are the most obvious beneficiaries of year-on-year dividend increases from investment trusts, ‘next generation’ dividend hero status is by no means coveted only by income-focused trusts.

The Mercantile is an excellent example of this breadth of appeal. Its arena of interest is UK mid-cap and smaller companies, where earnings are typically used to drive further growth, meaning dividends may play a more secondary and less predictable role.

However, Anderson makes the point that such a view is not strictly accurate. “There are many misconceptions around how income is generated in the mid and small-cap space,” he argues.

“In reality, dividend income in this part of the market is typically more evenly distributed than in the FTSE 100, where payouts are concentrated among a small number of large companies.”

For The Mercantile that has translated into a current dividend yield of 3.2% and five-year annualised dividend growth of 3.7%¹. Over the long term, the trust aims to ensure that increases in payouts at least keep pace with inflation – and indeed, over the past 30- plus years, annual compound dividend growth has averaged a substantial 8.5%².

Reliability against a tough backdrop

Over recent years, however, dividend increases have been achieved against the backdrop of a persistent derating for the mid-cap FTSE 250 index. It is now about 20% down compared with the end of 2019, as the sector remains unloved relative to other markets (and indeed to UK large caps).

As Anderson observes: “Income and returns are coming through fundamentals, not optimism. The Mercantile delivered net asset value returns of around 10% in 2025 in a difficult environment, driven by earnings growth and income rather than valuation re-rating.”

In other words, solid returns and dividend growth are coming from investment in robust companies able to deliver even when sentiment is against the market sector. As and when investors rediscover its attractions, returns could enjoy a meaningful boost.

This reflects the quality of companies held in The Mercantile portfolio. Anderson highlights Intermediate Capital Group (ICG), which accounts for around 3% of the trust’s portfolio³, as an example of the kind of mid-sized businesses that can contribute to a growing income.

ICG is an alternative asset manager. It has grown the money it looks after on behalf of clients for many years, with a fee-based model that can offer relatively stable cash flows.

“We've held it in the portfolio for over a decade,” says Anderson. “Importantly, it aims to provide investors with a stable dividend while also growing capital in the long term, offering both income today and the potential for it to rise over time.”

Of course, while some investors hold The Mercantile as part of an income-focused portfolio, many will choose instead to reinvest dividends and boost total returns through compound growth.

But whether you’re building your investment or drawing down from it, dividends that aim to keep pace with inflation over the years can play a key role in supporting long-term investment goals.

¹ 30 investment trusts make up next generation of dividend heroes, AIC, as at 23 March 2026

² Dividend paid by the product may exceed the gains of the product, resulting in erosion of the capital invested. It may not be possible to maintain dividend payments indefinitely and the value of your investment could ultimately be reduced to zero. Dividend payments are not guaranteed

Past performance is not a reliable indicator for current and future results.

³ Source: J.P. Morgan Asset Management, as at 28 February 2026. Strategy characteristics are illustrative and may be implemented through actively managed portfolios or funds. Holdings, allocations, and leverage may change at the manager’s discretion.

Summary Risk Indicator

The risk indicator assumes you keep the product for 5 year(s). The risk of the product may be significantly higher if held for less than the recommended holding period.

Investment objective: Aims to achieve long-term capital growth through investing in a diversified portfolio of UK medium and smaller companies. It pays quarterly dividends and aims to grow its dividend at least in line with inflation. The Company’s gearing policy is to operate within a range of 10% net cash to 20% geared. Gearing may magnify gains or losses experienced by the Company

The value of investments and the income from them can go down as well as up, and you may not get back the amount originally invested.

Key Risks: External factors may cause an entire asset class to decline in value. Prices and values of all shares or all bonds and income could decline at the same time, or fluctuate in response to the performance of individual companies and general market conditions. This Company may utilise gearing (borrowing) which will exaggerate market movements both up and down. This Company may also invest in smaller companies which may increase its risk profile. The share price may trade at a discount to the Net Asset Value of the Company. The single market in which the Company primarily invests, in this case the UK, may be subject to particular political and economic risks and, as a result, the Company may be more volatile than more broadly diversified companies. Companies listed on AIM tend to be smaller and early stage companies and may carry greater risks than an investment in a Company with a full listing on the London Stock Exchange.