Scottish Mortgage (LSE: SMT) shares were all the rage for years, but management pushed its luck to breaking point and came unstuck in 2022.
The FTSE 100-listed investment trust made hay in the era of low interest rates and massive stimuli by piling into high-risk growth stocks. It couldn’t last though.
A Scottish play on growth
I repeatedly warned that Scottish Mortgage had become over-exposed to US tech, something many private investors may not have realised due to its name. They would have looked at the performance figures – up 500% in five years at one point – and piled in.
Last year, the Scottish Mortgage share price crashed by half. It’s now down 30.49% measured over 12 months, and another 12.37% year-to-date.
Many investors continue to buy it, banking on a recovery at some point. That’s not the worst strategy in the world. Scottish Mortgage now trades at a 22% discount to underlying net asset value. At one point it was at a premium of 8.4%. Its share price will automatically rally when inflation and interest rates peak, and sentiment picks up.
I just don’t think we’re there yet. While the Office for Budget Responsibility claims inflation will have fallen to 2.9% by the end of the year, it looks sticky to me.
I’m currently focusing my firepower on buying attractively-priced FTSE 100 dividend stocks. Mostly, I’m buying direct equities, but there’s one investment trust I really fancy.
I have flagged up The City of London Investment Trust (LSE: CTY) before, highlighting its impressive long-term track record of generating a high and rising income from a portfolio of FTSE 100 blue-chip stocks.
Equity income hero
Currently, it yields 4.76% a year, comfortably above the FTSE 100 average of around 3.5% today. However, it would have to deduct the 0.33% annual charge from that, which reduces the effective yield to (a still decent) 4.43%.
City of London is famous for increasing its dividend payouts for 56 years in a row, making it a true dividend aristocrat. It does this by holding back returns in the good years and applying them in more volatile times to give smoother returns.
The share price is up 27.5% over five years and 7.4% over one year, beating its benchmark equity income sector on both occasions. There’s no guarantee it will always beat its benchmark, having suffered periods of underperformance, but that’s still impressive. The real attraction here is the rising dividend income.
In an unexpected twist, I don’t hold any of City of London’s top 10 holdings in my own portfolio. Buying it today would give me exposure to Shell, British American Tobacco, BP, BAE Systems, Diageo, HSBC and Unilever in a single swoop.
I’ve previously rejected buying City of London because I prefer to do the legwork myself, targeting cheap stocks with high yields. I will still continue to do that, but I’ve just transferred an old company pension fund into a SIPP, and City of London looks like a building block for my new self-managed pension portfolio.
It’s finally time to buy City of London, taking advantage of any FTSE 100 dips. I will then hold it all the way to retirement and beyond.
