Investing in individual stocks can be very profitable. But it’s also time-consuming — and the reality for many of us is that there just isn’t enough time in the day to research all the stocks we might want to own.
I believe that a mix of investment trusts and stocks can be an ideal approach for long-term investors. This provides upside potential from successful stock picks, plus valuable diversification and stability from investment trusts.
50 years of dividend growth
FTSE 250-listed Caledonia Investments (LSE: CLDN) has increased its dividend every year for the last 50 years. Very few individual companies have a record like this.
The trust aims to provide a mix of long-term capital growth and a reliable income. To achieve this, Caledonia invests in a mix of listed and unlisted businesses in the UK and overseas. Among the trust’s UK investments are FTSE 100 firm British American Tobacco, and FTSE 250 soft drinks group AG Barr.
During the first half of this year, the trust’s net asset value per share climbed 1.1% to 3,298p. This means that the trust’s current share price of 2,723p represents an 18% discount to the value of its underlying assets.
Investment trusts often trade at a discount to net asset value, and this isn’t necessarily a buying signal. But in this case I believe it could be a good opportunity. Caledonia has outperformed the FTSE 100 by 18% over the last 10 years, and by 50% over the last five.
This market-beating performance suggests to me that the trust’s managers have successfully focused on top-performing sectors of the market, avoiding those which have underperformed.
Although the dividend yield of 2% is fairly modest, remember that the payout has increased every year for the last 50. I believe this is a stock you could tuck away and hold forever.
What about Glaxo?
I sold my shares of GlaxoSmithKline (LSE: GSK) earlier this year, as did fund manager Neil Woodford. And I was interested to see that Glaxo isn’t among the 1%+ holdings in Caledonia’s investments either.
The pharma group’s share price performance has fallen by 17% this year and is 4% lower than five years ago — a period during which the FTSE 100 has gained 27%.
The group has clung onto its reputation as a high-yield stock by maintaining its 80p per share dividend, which provides a tempting prospective yield of 6.1%. However, this payout hasn’t been increased since 2013. Such a long period without an increase is often a sign that a dividend is getting hard to afford.
One way to view Glaxo’s weak growth is that it does too many different things. By operating a consumer health business and a pharmaceutical division, there’s a risk that management isn’t focused closely enough on either business.
Several big fund managers have called for the group to consider splitting itself up, which could result in a higher overall valuation than at present.
So far, management have resisted these calls. But with profits expected to fall next year and net debt stubbornly high, chief executive Emma Walmsley may soon come under increased pressure.
In my view, there’s no rush to invest in Glaxo. I’d wait until the group strategy becomes clearer before considering a buy.
According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…
And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...
It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…
But you need to get in before the crowd catches onto this ‘sleeping giant’.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AG Barr. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.