City of London: A tough year, but an attractive 6.1% yield

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City of London: A tough year, but an attractive 6.1% yield

It has been a challenging time for the City of London investment trust with a double digit annual loss, yet by using its reserves it has been able to increase the dividend for a fifty-fourth consecutive year.

In the annual accounts to the end of June the £1.5bn City Of London (LON: CTY) made an NAV total return of -14.6%, which was slightly worse than the fall of 13% in its FTSE All-Share benchmark. This underperformance was largely due to the gearing – borrowing additional funds to invest – that detracts from the returns in falling markets.

Longstanding manager Job Curtis acknowledged that it has been a difficult period for profits and dividends due to the coronavirus and this week has also started badly with fears of further restrictions weighing on the trust’s share price. Curtis though believes that the worst is over and there should be improvement going forward.

The portfolio

City aims to provide long-term growth in income and capital by mainly investing in shares listed in the UK. The advent of the coronavirus led the manager to completely dispose of cinema operator Cineworld, contract caterer Compass and hotel operator Whitbread, while the position in cruise operator Carnival and the various banking stocks were scaled right back.

The portfolio was already underweight in the retail sector because of the structural shift to online shopping, although positions were added in the supermarkets WM Morrison and Tesco. It now has a core of defensive, relatively stable companies, as well as some exposure to attractively valued stocks with the potential for recovery.

At the end of August the manager had 21.5% of the assets invested in consumer staples and sellers of essential products such as BAT, Unilever and Diageo, with a further 8.5% in the pharmaceuticals sector. The overseas allocation has increased from ten percent to 14%, with the main focus being on economies that are likely to grow faster than the UK.


Earnings per share fell from 19.8p in the 2019 financial year to 15.7p in 2020 due to the widespread dividend cuts that saw nearly half of FTSE 100 companies pass or reduce their dividend. By using the trust’s reserves the board was able to increase the annual distribution to 19p and it expects to increase it again in 2021, which would extend the dividend growth record to 55 years.

After accounting for this year’s final payment the trust has revenue reserves equivalent to 0.3 years’ of dividends and it also has the ability to distribute the capital reserves that are ten times greater. Based on the current share price of 308p it offers an attractive prospective yield of 6.1% with quarterly distributions.

The analysts at Numis view City of London as a core holding for income investors in view of the strong long-term performance, attractive yield and unblemished history of dividend growth. It also benefits from one of the lowest ongoing charges ratios in the sector at just 0.36%.

There is no doubt that the UK stock market has been hit hard by the coronavirus and the uncertainty over Brexit and this is likely to continue at least for the next few months. Dividend paying stocks have been some of the worst affected, but if you are in it for the long-haul and want a decent income then City remains a good option.

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