Some relief for income investors came on Friday when The City of London Investment Trust (CTY) raised its dividend by 2.2% to 19 pence per share for the year ended 30 June 2020, the 55th consecutive year of increases, by dipping into its substantial revenue reserves. The shares were unchanged at 322p.
Chairman Philip Remnant commented, ‘the large fall in dividends paid has taken down the true yield of the UK equity market to between 3% and 4%, and in line with our objective City of London's yield stands at a premium to that. This remains significantly in excess of the main alternatives of fixed interest and bank deposit rates’.
TAPPING REVENUE RESERVES
One of the advantages that trusts have over open ended funds is that they can dip into revenues reserves and capital to supplement the payment of dividends when the underlying income from their investments falls.
The trust had revenues reserves of £58.3 million and capital reserves of £271.8 million at 30 June 2020.
Almost half of FTSE 100 companies where the company is invested, have passed or cut their dividends in 2020 which had a negative impact on the firms revenue per share which fell 20.4%, to 15.7 pence per share.
Investment trusts can borrow funds to invest in the assets of the fund which amplifies returns when things go well but detracts from performance when the value of investments falls.
Gearing was between 8%-to-11% during the period and detracted 2.4% from returns.
The NAV total return fell 14.6% over the year compared with minus 13% for the benchmark while the share price dropped 16.2%.
Stock selection was positive and added 0.9% to net asset value with the biggest contributors coming from underweight positions in Royal Dutch (RDSB) and HSBC (HSBC). Overseas stocks Microsoft and Nestle were also positive contributors.
Greene King, the pub group which was taken over by CK Asset Holdings of Hong Kong, was also a notable contributor. The biggest stock detractor was AstraZeneca (AZN), in which the trust had an underweight position.
The manager has a bias towards income producing stocks, but feels no need in the current environment to chase a dwindling group of higher yielding corporates, running the inherent risk of dividend traps, in order to build on City of London's unique dividend record.