Here is a riddle. Space Exploration Technologies, commonly known as SpaceX, has (unsurprisingly) not declared a dividend since its recent listing. I think it is unlikely to do so any time soon given that SpaceX is in growth mode and needs lots of capital to fund its growth plans.
Yet despite that, some people’s passive income streams could be boosted by the strong performance of SpaceX shares. How come?
The role of investment trusts in converting growth to income
The answer is that some investors will be able to sell SpaceX shares for more than they paid for them. But wait, you say. That is not income – that is a capital gain. And you would be right – so far as those investors are concerned.
But what if those investors then used some of those capital gains (or even all of them) to fund dividends to their shareholders? Then, suddenly, it could be passive income. That is exactly what some investment trusts do.
Understanding how such an approach operates can potentially turn some brilliant growth opportunities into passive income opportunities too.
A dividend run stretching back almost a century
As an example, consider the Scottish Mortgage Investment Trust (LSE: SMT). An investment trust run from the Scottish city since before the Titanic sank may hardly seem an obvious place to look for understanding of financing behind the current space race.
In fact though, Scottish Mortgage did brilliantly by taking a long-term investment position in Tesla. It has sold that altogether, taking massive profits in the process. (Interestingly, it owns a stake in Tesla’s rival BYD).
Having done so well with its Tesla stake, Scottish Mortgage invested in SpaceX years ago when it was a private company.
Soaring valuations mean that it now represents 17.9% of Scottish Mortgage’s total assets. If SpaceX stock keeps performing strongly as it has done in the week since its flotation, the actual number could be even higher than that.
Here is another interesting fact about Scottish Mortgage: it has not cut its dividend per share since the fallout of the 1929 stock market crash.
Yet its growth focus means the trust’s portfolio is stuffed with shares many of which pay no dividend. So how can it maintain let alone keep growing its own shareholder payout?
Growth can fuel income
The modest size helps – Scottish Mortgage’s yield is only 0.3%. But it also helps that, as a general rule, a company can use spare funds to pay dividends. That could be income it earns in the ordinary course of business.
It could be dividends it earns from investments. Or it could be money raised from asset sales. That might be selling a factory or some land. But it could also be selling shares.
Scottish Mortgage’s growth focus means there is a risk that a sharp tech downturn could hurt its performance. But it has a strong track record in identifying promising companies, as shown with SpaceX.
The trust’s share price is up 45% in a year and I see it as a share for investors to consider.
Should you invest £5,000 in Scottish Mortgage Investment Trust Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
