In my article for the October issue of Master Investor magazine, Smooth Operators, I looked at which investment trusts have the longest record of increasing their dividends. Leading the way was the City of London (CTY), which has recently published its Annual Report for the year ended 30th June 2015.
The City of London Investment Trust aims to provide long-term growth in income and capital by mainly investing in UK listed equities. It has a market value of just under £1.2bn and is trading at a small premium to NAV.
Job Curtis, the manager, is a value investor who builds the portfolio from the bottom up based on the company fundamentals, whilst also taking into account his view of the wider macro environment. He looks for cash generative businesses that are able to grow their dividends with attractive yields.
During the financial year ending on 30th June Curtis was able to increase the fund’s NAV by 6.4%, which was broadly in line with the rest of the sector but well ahead of the 2.6% improvement in his FTSE All-Share benchmark. The main reasons for the outperformance were the overweight positions in housebuilding stocks and Real Estate Investment Trusts.
CTY has a diversified portfolio of 119 stocks with the top 10 making up just 27% of the fund. These include: British American Tobacco, Royal Dutch Shell, HSBC and Vodafone, with the largest position only 4%. Curtis describes it as a ‘balanced approach’ albeit with below average exposure to the oil sector.
The dividend has recently been increased by 3.7% to 15.3p, which makes it the fund’s 49th consecutive year of raising the pay-out. City of London’s shares are now yielding a healthy 3.9% with quarterly distributions.
It is worth noting that the dividend for the 2015 financial year was fully covered by the company’s earnings. This has enabled it to set aside additional revenue reserves that can be used to protect future distributions if any of the underlying holdings were to run into difficulties.
The years of steady increases can make a significant difference to long-term investors. An investment of £10,000 on 1st July 2004 would have bought 5,291 shares, which means that the total annual dividend of 8.62 pence in the 2005 financial year would have been worth £456. For the year ending 30th June 2015 the income from the holding would have risen to £809 and the capital value would have grown to £20,656.
Over the last 10 years the City of London investment trust has generated a total return of 157% whereas its FTSE All-Share benchmark has only made 83%. It is a strong record, especially if you are looking for a reliable, rising stream of income.