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The £1.6bn City of London investment trust (LON:CTY) has recently announced that it has successfully raised its dividend for the 52nd year in a row. For the 12 months to the end of June shareholders received an income of 17.7 pence per share, which represents a healthy increase of 6% on the year before.
A well-managed UK Equity Income fund like this can generate inflation-beating returns and rising dividends. For example, data compiled by the AIC shows that a long-term investor who bought £10,000 of City of London shares at the end of June 2008 and held them for the following 10 years would have made a capital gain of £17,365 and by 2018 would enjoy an annual income of £711.
The fund’s 10 largest holdings at the end of June included the oil majors Shell and BP, which are benefiting from share buy backs and dividend increases; there is also HSBC, which offers an attractive dividend yield and exposure to the fast-growing Asia Pacific region; and there’s Lloyds, which has strengthened its capital ratios and is expected to continue to increase shareholder distributions.
The portfolio’s underlying holdings are able to benefit from global growth
Manager Job Curtis estimates that around 70% of sales for UK-listed companies comes from overseas, which means that profits and dividends on the portfolio’s underlying holdings are able to benefit from global growth. In the year to the end of June this enabled revenue per share to rise by 5.1% to 18.7 pence.
The beauty of using an investment trust is that it doesn’t have to distribute all of its income, but can set aside up to 15% in its revenue reserves. These can be used to top-up the distributions in a bad year so that shareholders don’t suffer a fall in their standard of living, with City of London having built up a prudent 0.6 years’ worth of dividends.
Despite the healthy increase in the income, the NAV total return of 6.3% for the year to the end of June lagged behind the 9% increase in the FTSE All-Share benchmark. This was mainly due to being underweight in the Oil & Gas sector, which benefited from the increase in the oil price, and the underweight position in mining, as well as the disastrous investment in Provident Financial.
Core holding for UK Equity Income investors
The broker Numis considers City of London to be a core holding for UK Equity Income investors. They say that Curtis, who has managed the fund since 1991, has a strong long-term track record with the 10-year NAV return of 156% outperforming the 128% increase in the FTSE All-Share.
City Of London pays an attractive yield of 4.2% with quarterly dividends and has increased its annual distribution for the last 52 consecutive years. It has a diversified 101-stock portfolio with low ongoing charges of just 0.41%. The fund is currently trading on a 1.6% premium to NAV and issues shares on a regular basis to meet the demand.