One well-known UK income share that has grown its dividend annually for over half a century is City of London Investment Trust (LSE: CTY). The trust has increased its payout each year since England last won the World Cup. Hopefully this year could bring good news on both fronts again!
But while City of London is well-known – its market capitalisation of £2.8bn earns it a place in the FTSE 250 index – its long-term record of regular dividend growth is not unique.
Bankers Investment Trust and Alliance Witan have been increasing their dividends annually for just as long as City of London has.
A number of other shares, from F&C Investment Trust to Scottish American Investment Company, have increased their payout per share for north of half a century.
There’s a common theme here
There are some operating businesses that have an equally impressive track record. Industrial manufacturer Spirax Group, for example, has also grown its dividend per share each year for over half a century.
But what is immediately noticeable about the shares I mentioned above is that they are investment trusts, not operating companies.
Even the best-run company can suffer during periods of economic downturn. That often leads them to reassess their spending priorities. Dividends – which are never guaranteed for any share – can be cut as a consequence.
By contrast, investment trusts are typically firms with few employees and no operations beyond running the trust: they mainly own shares (or other assets).
That matters in this context because it means that they do not face the immediate financial pressure an operating company might do during tough times, with customers cancelling orders and suppliers suddenly hiking prices.
No share is risk-free
Still, while I see that as an advantage, it does not mean that an investment trust will be unaffected if the economy is weak.
Its own shareholders may sell, pushing down its share price. Its income streams could suffer if shares it owns cut their payouts.
At the moment, for example, City of London’s 10 biggest holdings include HSBC, Shell, Natwest Group, Imperial Brands and BP. They all cut or cancelled their dividends during the 2020 stock market crash.
Long-term income potential
So, how has City of London – like some rivals – managed to keep growing its own dividend like clockwork?
That reflects the trust management’s choice of where to invest. The trust currently holds stakes in close to 80 different companies. That level of diversification can help it weather the storm even when some of its larger stakes cut their dividends.
The shares it owns I mentioned above are all blue-chip FTSE 100 members and reflect City of London’s strong focus on big, proven UK businesses. That is not limited to the main index, though. City of London also owns stakes in some FTSE 250 enterprises such as ITV and Victrex, currently yielding 6.2% and 9.7%, respectively.
Such reliance on UK companies brings a risk that if the British market does badly, City of London’s income streams could fall. That is a risk to the dividend.
From a long-term perspective, I see it as a stock for investors to consider.
