City of London Investment Trust (LSE: CTY) is set to deliver a 50th consecutive annual dividend increase in 2016. Picking great dividend shares has helped City of London outperform the FTSE All-Share Index over the past three, five and 10 years.
The trust counts FTSE 100 blue chips Barclays (LSE: BARC), Prudential (LSE: PRU) and British American Tobacco (LSE: BATS) among its favoured stocks.
Barclays
Despite having avoided a government bailout during the financial crisis, Barclays has been struggling to sort itself out and regain the trust of investors. The bank has seen more than its fair share of scandals, and how to make its investment banking business work has been a particular thorn in the side of management.
Barclays announced the appointment of Jes Staley as its new chief executive at the end of October. Mr Staley, a 30-year veteran of JP Morgan — latterly leading the group’s global investment bank — appears to have all the right credentials to get Barclays back on track. And if his immediate purchase of £6.5m worth of shares is any guide, he’s certainly confident of doing so.
The City of London trust has been warming to the banking sector over the past year. It bought back into Lloyds, and increased its stake in Barclays after the appointment of Mr Staley.
Analysts expect Barclays to post a 20%+ rise in earnings when it releases its results for 2015, followed by a similar rise in 2016, giving bargain-basement price-to-earnings (P/E) ratios of 8.5 and 7.1, respectively.
Forecast dividends are well-covered by earnings, and give an attractive yield of 3.6%, rising to 4.5%, with plenty of scope for further uplifts.
Prudential
Another sector within the financial industry towards which City of London has a bias is life insurers. Prudential is the biggest life insurer in the Footsie and is in the top 10 holding of the trust.
Prudential has strong positions in Asia, meeting the needs of a growing middle class, and in the US annuities market. The UK business has been thriving, too, with recent pension freedom reforms proving a boon.
Prudential has been knocking out strong annual earnings growth, and analysts see this as set to continue. They expect a 14% rise in earnings when the company releases its results for 2015, followed by a 9% rise in 2016, giving a P/E ratio of 12.4, falling to 11.4. Dividend forecasts give a yield of 3%, rising to 3.3%.
The earnings rating and dividend may not scream bargain, but look reasonable value for a proven, solid financial company.
British American Tobacco
When it comes to proven and solid, you’ll do well to find a better example than British American Tobacco (BAT). Even the best-managed banks and insurers can’t insulate themselves from economic cycles, but tobacco companies, with their addictive products, are far less impacted by the macro-economic environment. BAT offers the additional protection of unparalleled geographical diversification, as it’s the world’s most international tobacco company.
BAT is the largest holding of the City of London trust. Earnings aren’t forecast to have increased in 2015, but growth is expected to resume at 7% for 2016, giving P/Es of 18.6 and 17.4, respectively. Reliable defensive companies, such as BAT, tend to trade on high earnings ratings. Nevertheless, dividend forecasts give an attractive yield for 2015 of 4%, rising to 4.3% for 2016.
