Those keen on passive income are likely to be interested in a list of ‘Dividend Heroes’ maintained by the Association of Investment Companies (AIC). It identifies investment trusts that have increased their annual payouts for at least 20 consecutive years. Incredibly, four of the 21 have raised them for 59 years in a row.
Importantly, these trusts are allowed to hold on to 15% of their income each year in a rainy-day fund. This facilitates dividend smoothing. When the income received from a trust’s investments drops, it can use its reserves to maintain its payout. That way, it can keep increasing its dividends for long periods, even if its own income falls.
Is there a catch?
As impressive as it might be to keep increasing a dividend for nearly six decades, it doesn’t guarantee a healthy yield. For example, Bankers Investment Trust, Alliance Witan, and Caledonia Investments – three of the four that have raised their payouts for 59 consecutive years – are currently (8 June) yielding 1.8%, 2.1%, and 2.1%, respectively.
By contrast, the fourth – City of London Investment Trust (LSE:CTY) – is offering an above-average return. Based on amounts paid over the past 12 months, it’s yielding 3.8%.
Of course, there are no guarantees this will be maintained. But a near-4% yield is comfortably more than the 3.1% return of the FTSE 100. This is the index where most of the trust’s investments can be found.
What does it invest in?
The investment objective is to “provide long-term growth in income and capital”. It aims to do this by investing “principally” in equities listed on the London Stock Exchange. Significantly, it “fully recognises the importance of dividend income to shareholders”.
At the end of April, its 10 biggest holdings – all familiar names on the FTSE 100 — accounted for 38% of its £2.94bn of investments. Based on market cap, it owns 15 of the 20 largest on the index. And as a reminder how investing in quality companies over the long term can deliver significant wealth, the trust’s sitting on a paper gain of just over £1bn.
However, critics will point out that, both in terms of share price and net asset value, it’s performed pretty much in line with its chosen benchmark, the FTSE All-Share index, over the past 10 years. In fact, an index-linked fund would have done marginally better.
Also, it has nearly 22% of its investments in FTSE 100 banks and pensions providers. This is a relatively high exposure to the UK financial services sector.
Positively, it has a low level of debt. And its blue-chip portfolio comprises many of the UK’s most successful companies. With their global brands and strong balance sheets, I think they’re well positioned to grow over the coming decades. Indeed, I have many of its investments in my own portfolio.
Final thought
As impressive as their track records of increasing dividends might be, we’ve seen that the AIC’s ‘Dividend Heroes’ don’t necessarily offer the most generous yields. In fact, there are plenty of other higher-yielding opportunities to consider elsewhere. However, those investors seeking a balance of growth and income – who like the idea of having a stake in 78 mainly UK companies — could consider taking a position in City of London Investment Trust.
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James Beard does not hold any positions in the companies mentioned.
