The City of London investment trust is the latest addition to Questor’s income portfolio. It neatly aligns with our aim of generating a generous, reliable and growing income return over the long run.
Indeed, it has raised dividends in every year since 1966. Given the wide range of economic challenges that have taken place over recent decades, a 57-year unbroken stretch of growth in shareholder payouts is hugely impressive.
Moreover, the company’s dividend growth of 41pc in the past decade is ahead of total inflation of 34pc over the same period. This substantial real-terms growth in shareholder payouts equates to greater purchasing power for investors – the importance of which should never be overlooked – with a likely lower future rate of inflation set to make the task of further real-terms growth somewhat easier.
The trust’s dividend yield of 4.6pc further enhances its income appeal at a time when the FTSE All-Share index, which is its benchmark, currently yields around 3.7pc. The company’s diverse range of holdings, meanwhile, provides risk reduction benefits and the prospect of a more reliable dividend at a time of relative uncertainty for the world economy.
Currently, around 86pc of the trust’s net assets are invested in UK-listed stocks. The remainder is mostly focused on European and US-listed firms, with its largest holdings being familiar, globally-focused names such as BAE, Shell and HSBC. Given that the portfolio contains 85 holdings, with its largest ten positions accounting for around 35pc of net assets, concentration risk does not appear to be a major threat.
Of course, a continuation of restrictive monetary policy across developed markets could hamper profitability and, therefore, dividend growth across a variety of industries in the short run. Since this column takes a long-term view, however, a likely reduction in interest rates in the US, Europe and – perhaps most importantly given the trust’s focus on FTSE All-Share stocks – the UK, means dividend growth is set to remain brisk over the coming years.
The trust currently trades at a 2pc premium to net asset value. While this is in line with its average premium over the past year, it means the trust is more expensive than many other companies. Given the trust’s net asset value has risen by 81pc over the past decade, versus a 78pc total return for the FTSE All-Share index, and it currently has a substantially higher yield than its benchmark, this column believes that it still offers relatively good value for money.
A gearing ratio of roughly 5pc, meanwhile, means the company’s share price could prove to be more volatile than the wider index. However, given that debt magnifies returns, and this column is highly optimistic about the long-term return potential of the stock market, modest gearing is likely to provide a boost to total returns.
Indeed, the trust seeks to deliver a mixture of capital growth and dividends. It uses a bottom-up approach that focuses on companies capable of generating strong cash flow, with around 60pc of holdings typically being larger stocks and the remainder invested in small and mid-cap shares. This sizeable exposure to stocks outside the FTSE 100 could prove to be particularly beneficial due to their relatively low valuations at present.
While the trust has never featured in our income portfolio, it has previously been tipped by Questor. Although its share price has risen by a rather disappointing 9pc since our original buy recommendation in April 2018, an income return since then of 29pc means its total return amounts to 38pc. Given its relatively attractive valuation, modest gearing and track record of outperformance versus the wider index, it remains a worthwhile long-term purchase.
Its addition to our income portfolio will be partly funded by cash generated from recent sales, with the remainder provided by the removal of US-listed investment management company Rithm Capital. It has produced a very disappointing capital loss of 35pc since being added to the portfolio in March 2017.
With upcoming interest rate cuts likely to prompt a stronger global economic outlook, dividend growth among the City of London investment trust’s wide range of holdings is set to improve. Moreover, its relatively attractive yield and long track record of real-terms dividend growth mean it represents a logical addition to our income portfolio.
Questor says: buy
Ticker: CTY
Share price at close: £4.37
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