Zero Dividend Shares
Investment trust zero dividend preference shares pay you back at a fixed price at a set date, but don’t pay any income – hence the name. Zeroes have a fixed redemption price that is paid when the trust they are part of comes to the end of its life – they give you the chance of locking into a return worth 7% or 8% a year for the next five or six years.
Although they depend on the performance of the stock market, they are low-risk because zero shareholders are first in line for repayment at maturity. They are not guaranteed, but all the zeros that have matured so far have paid out as expected. The risk of getting less back at maturity than you invested in a zero is very small. Stock markets would have to fall through the floor.
Some offer a higher return than others, but may be less secure. You can judge the security by looking at the cover for a zero. If it is more than 1, it means that there is more than enough in the investment trust to pay off the zeros at maturity. Virtually all zeros currently have cover of more than 1. But if share prices fall, zeros will be less well covered. Advisers suggest you should look for cover of at least 1.3.
You can sell a zero at any time. You don’t have to wait until the maturity date. The price of a zero should gradually rise over its life, so you are likely to make a profit when you sell. You should check the hurdle rate. This shows the rate at which the investment trust has to grow in value each year to pay off the zeros at maturity. Most zeros have negative hurdle rates, so trust values can fall and zero holders still get repaid.