An investment trust should be part of any good long-term portfolio. Investors seeking strong dividends are facing tough choices right now. The temptation to go all-in on cheap-looking FTSE 100 shares is massive.
But we can be certain of one thing. The road ahead will be shaky. And with so many FTSE 100 dividends uncertain, cut, or scrapped altogether, income plans have been shot to pieces.
Happily, there is an investment decision you can make that is an island of relative certainty in these uncertain times. Four investment trusts on the market have a hard-won reputation of improving dividend payouts for over 50 years. Today I’ll focus on the one I think is best.
No cuts, no buts
It is inconceivable that the trust I cover below would scrap or reduce its dividend, for two reasons.
One, it does not want to give up a gold-standard accolade that it has worked for over half a century to maintain.
Two, its closed-ended structure — in direct opposition to an open-ended investment trust — means it has a unique advantage. It does not have to pay out all of its income every year. In fact, it can set aside up to 15% to smooth out market disruptions. When stock markets crash, as they did in March 2020, these rainy day funds really come into their own.
City of London Investment Trust
This FTSE 250-listed dividend hero has increased its payments to investors for 53 years in a row. In 2017–18, it paid 4.3p per share every quarter. In 2018–19, that was 4.55p, and in 2019–20 there were 4.75p in dividends per share. That represents a 5.62% yield.
Janus Henderson’s City of London Investment Trust (LSE:CTY) is managed by Job Curtis. He has been at the head of the fund, seeking reliable income, since 1991.
The fund’s holdings are mostly household names. Many are UK-based multinationals on the FTSE 100, big hitters like Royal Dutch Shell, British American Tobacco, Diageo, Unilever, and GlaxoSmithKline.
From the FTSE 250, it owns Victrex, XP Power, and Direct Line. Then there is a selection of market-leading global firms. From the United States there are Microsoft, Johnson and Johnson, and Coca Cola. From Europe, there is Switzerland’s Nestle, which this week reported its fastest sales growth in five years, and German companies Siemens and Deutsche Telekom.
Curtis said recently his investment philosophy is valuation-driven. He noted “It is a conservatively managed trust. I believe in buying shares at a reasonable valuation, taking into account growth prospects. I like large companies with strong balance sheets, good cash generation and those that can pay dividends as well as invest enough for the future.”
Spread your risk
I think this kind of investment trust works best if you are a seasoned investor, perhaps hoping to retire sometime this decade. How you spend that time is totally up to you. If it were me I’d be on the golf course (whenever they reopen) or constantly on holiday (whenever that’s a thing again).
But the really attractive portion of owning an investment trust is not just the regular dividends. It’s the diversification.
I would argue that rather that individually buying stakes — and paying fees each time — in all 103 companies the City of London Trust owns, there is a better, lower-cost way. If you think about it, I believe you’ll agree with me.
Tom Rodgers owns shares in GlaxoSmithKline. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline, Microsoft, and Unilever. The Motley Fool UK has recommended Diageo, Johnson & Johnson, Victrex, and XP Power and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. 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.