City of London Investment Trust: one for income investors

The City of London Investment Trust’s (LON:CTY) dividend yield of 4.8% is likely to appeal to a wide range of income investors at the present time.

After all, interest rates are at historic lows. They are not expected to rise for at least 2.5 years, and could even move into negative territory in the meantime if the post-Covid economic recovery stalls.

Furthermore, rising inflation that recently reached its highest level in three years means that the real return on assets such as cash and fixed-income securities has become even less appealing. And, with the FTSE 100 and FTSE 250 having dividend yields of 3% and 1.9%, respectively, the trust offers a relatively attractive income return.

Global dividend growth

Of course, the City of London Investment Trust’s high yield is unsurprising. It is an income-focused company that aims to grow dividends and capital over the long run. It has a long track record of success in this regard, with dividends per share growing at an annualised rate of around 5% over the past 20 years.

The City of London Investment Trust currently trades at a 2% premium to its net asset value (NAV). Its ongoing charges figure (OCF) of 0.36% is similar to many of its peers.

Meanwhile, the trust’s geographic focus is squarely on the UK, with around 88% of its holdings being UK-listed entities. However, a glance at its largest holdings shows that it generates a large proportion of its income from across the world.

Among its top ten portfolio constituents are popular global income shares such as British American Tobacco, Shell and HSBC. However, there are also stocks capable of delivering dividend growth, including Diageo, Unilever and M&G. As such, the prospects for the trust’s dividend payouts to grow on an after-inflation basis appear to be relatively high.

Risk/reward considerations

The City of London Investment Trust’s top ten holdings make up 29% of its total assets. Its 83 holdings in total suggest that it offers a diverse portfolio that is reflected in its relatively low levels of volatility in recent years. Indeed, it is a top-quartile performer among its peer group based on volatility in the past three years.

Accolades have been harder to come by when judging the trust’s risk/reward tradeoff. Even when its low volatility is taken into account, the trust has delivered a third-quartile Sharpe ratio over the past three years.

This is due to its underperformance of the Investment Trust UK Equity Income benchmark. It is a third-quartile performer over the past five years, having delivered a 29% total return versus 45% for the benchmark.

A key reason for this could be the unpopularity of many of its major holdings in an era when investors have rotated from value to growth stocks on mounting hopes of an economic recovery. Indeed, its share price has outperformed the benchmark by 17% on a cumulative basis over the past decade, with a total return of 101% versus 84% for the benchmark.

Long-term appeal

As such, the City of London Investment Trust’s long-term track record of capital appreciation and dividend growth, alongside low volatility, may sufficiently offset its recent underperformance to merit interest among income investors. It could appeal to a broad range of dividend-seeking investors aiming to overcome persistently low interest rates, and rising inflation, over the long run.

This article was brought to you in partnership with The Armchair Trader.