Investing for retirement income can be tricky because you need to take that income regularly and you don’t really want short-term dividend cuts. Who guessed, for example, that BP would have to slash its dividend in the wake of the Gulf of Mexico disaster?
That’s where investment trusts come in. As they’re allowed to retain up to 15% of the income they earn each year, they can save cash in stronger years in order to keep dividends going in weaker years.
My first pick today is City of London Investment Trust (LSE: CTY), which last year paid out a dividend yield of 4.1%. What’s more, City of London has one of the best records in the business for long-term dividend rises. According to the most recent survey from the Association of Investment Companies (AIC) in March, the trust has lifted its dividend every year for more than 50 straight years.
The share price performance has pretty much kept track with the FTSE 100 over the past five years with only a modest 7% rise, but looking back 10 years, we see a doubling compared to the Footsie’s 70%. I think that reflects the focus on UK investments and the UK economy over the past decade, and the long-term outperformance against the index convinces me there’s quality investment management at the helm.
Net asset value (NAV) per share at the end of April came in at 414p, which matches very closely with the current share price of 413p. Investment trust shares often trade at a discount to NAV, and the absence of a discount here suggests investors are prepared to pay a little more for the long-term reliability of those dividends.
Given that focus, it’s perhaps not surprising that the Bankers share price has outperformed City of London’s over the past decade with a a 178% rise. It’s also up 55% over five years, a period when UK investments largely stood still.
Bankers doesn’t offer such high dividend yields, mind, averaging around 2.5% per year in recent years. But they are progressive, and it’s another of the AIC’s ‘Dividend Heroes’ to have upped its annual payment every year for more than half a century.
Even after the trust’s superior five- and 10-year performance, the shares are trading on what I see as an attractive valuation. With NAV standing at 922p per share at 30 April, the current share price of 888p puts the discount at 3.7%. By investment trust standards that’s a low one, and you often see them priced on double-digit discounts, so again I think that represents a high degree of confidence from investors.
With smaller investment trusts, a strategy of looking for underrated shares with unjustified discounts can be profitable, though with a little bit more risk — I confess I sometimes have no idea why a trust’s shares sell for so much less than NAV.
But for retirement income, I definitely think there’s a benefit to sticking with the most trusted ones. I see Bankers and City of London fitting that bill, focusing on dividends but with some growth thrown in, and offering a nicely diversified worldwide spread of investments.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple and Microsoft. The Motley Fool UK has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. 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.