UK Edition
Three years ago we tipped City of London, calling it the “ideal trust for savers who need retirement income”.
The venerable portfolio, which dates back to the 19th century, did what we said it would and this year extended its run of annual dividend increases to 55 years, confirming its “dividend hero” status.
Thanks to its savvy use of dividend reserves – a helpful quirk of investment trusts that allows them to store cash for a rainy day – it was able to maintain payouts even when many listed companies stopped paying shareholders during the pandemic.
Its shares now yield 4.9pc, one of the highest rates on offer in its “UK equity income” sector.
While its reserves were depleted to maintain its dividend record, it has begun to rely less on its kitty to pay shareholders. In 2020 it used £14.4m of reserves to support its divi but this year used just £8.1m. It has £37.6m left, but now that dividends have begun to flow in full again its rainy day fund should start to be replenished.
Alan Brierley, of bank Investec, says: “It is unlikely to break its track record of increasing payouts now that it is through the crisis. This is the key reason for owning the trust. Its revenue reserves were bruised but have survived.
“It can also dip into its capital to pay shareholders, so investors can sleep well at night knowing that they will get a growing dividend from City of London.”
While income matters, “total return”, which includes capital growth alongside dividends, is also important. Questor has some concerns about the trust’s short-term performance. The shares trade at 387.5p, 3pc below the price at which we tipped them in April 2018. Over this period the FTSE All-Share index has risen by 5pc.
On a total return basis it has returned 14pc since our tip, while the FTSE All-Share has returned 20pc. Reliable income has not been matched with strong capital gains.
But Shavar Halberstadt, of Winterflood, the stockbroker, says short-term performance should not put investors off.
“Looking back over manager Job Curtis’s tenure in charge shows that he has done a very good job. Since 1991 the trust has returned 558pc, including dividends, compared with 503pc for its benchmark index and 473pc for the average manager in its peer group,” he says.
“We have no concerns about performance. If you want capital growth this is not the trust for you but those who want income are well served.”
Another consideration is who will succeed Curtis when he eventually retires. He has been at the helm for more than 30 years but the appointment of David Smith as his deputy earlier this year suggested that a handover could be looming.
This column is not worried, however, because Smith has experience managing income-generating funds and comes from the same firm as Curtis, Janus Henderson. He currently manages the Henderson High Income Trust, a position he has held since 2013, and has run the UK portfolio of Bankers Investment Trust since 2017.
Brierley says: “Manager change is inevitable. Curtis will leave big boots to fill but Smith will be involved in a long handover period so there should not be any issues.”
Halberstadt agrees. “David Smith as deputy is sensible and he will continue Job Curtis’s investment style,” he says. “He has lots of experience and manages Bankers, whose dividend record is not far behind City of London’s, so he knows the value of paying a reliable income to shareholders.” Hold.
Questor says: hold
Ticker: CTY
Share price at close: 387.5p
Investment trust news
Pantheon International, the private equity investment trust tipped here in May 2018, carried out a 10-for-one split of its shares on Nov 1. At 335p, the shares trade at a 10th of what they would have cost before the split.
Ruffer Investment Company, tipped in 2016, will offer up to 56.2m new shares to existing shareholders on a one-for-four basis. They can buy at 296.5p per share, a 0.8pc discount to the current price of 299p. Shareholders should be contacted about the offer by their broker and have until Dec 1 to take up the offer.
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