When it comes to earning passive income, like many investors I look for dividend shares to buy. But I sometimes also buy into an investment trust.
One well-known investment trust (in fact it is even a FTSE 250 member) has been raising its dividend annually for over five decades.
Should I buy it for my portfolio?
More information please!
Knowing a dividend’s track record is never enough on its own for me to decide whether or not to buy a share. The same applies to knowing the dividend yield (which in this case is 5.2%).
Why?
A track record or historical yield is backwards-facing. What a company has done in the past is no guarantee of what will happen in future.
So, while the share in question – City of London Investment Trust (LSE: CTY) is a Dividend Aristocrat with a stellar record of annual raises, I need to know more than that when considering whether to invest.
Funding a dividend
In the case of a company running a business, like Shell or Microsoft, I look at the business model and try to assess whether it will generate free cash flows in future that could help support the dividend.
When it comes to buying an investment trust, though, that technique can have its limitations. A trust can raise funds that that help it pay a dividend but are not necessarily conducive to long-term value creation. That is a general concern I have: I am not saying it applies to City of London.
So when eyeing a trust as a potential buy for my portfolio, I look at its investment strategy and current portfolio.
I also consider its net asset value. City of London shares are trading at a slight discount to net asset value at the moment, but the discount is under 1%.
Growth and income?
Over five years, the value of the shares has slid 3%.
With an investment approach heavily slanted towards owning blue-chip British shares, I think the long-term outlook for the investment trust will be broadly similar to that the FTSE 100 index of leading shares that dominate its holdings. If the managers do a good or bad job of selecting shares, they could outperform or underperform the index.
One benefit of investing in a unit trust rather than buying the shares directly myself is that I can get a level of diversification without needing to buy dozens of different shares myself.
I also like the dividend prospects offered by City of London.
It owns high-yield shares such as British American Tobacco. It also has stakes in a wide variety of iconic British firms that I think have sizeable ongoing dividend potential, from Tesco to Unilever.
I see a risk that a weak broader economy could hurt the performance of City of London. But, if I was looking for a passive income stream I think could grow in coming years and had spare cash to invest, I would be happy to add it to my portfolio.
