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Buying shares in an investment trust can be appealing for a number of different reasons. Some investors like the opportunity to diversify even on a small budget, as buying into an investment trust usually involves indirect exposure to a portfolio spanning multiple shares.
Another potential attraction is income. Some investment trusts have raised their dividend per share annually for decades. Some have even done so for over half a century.
Long-term dividend raisers
Those trusts with an unbroken 50+ year record of annual dividend growth include Bankers Investment Trust and Alliance Witan, both currently yielding 2.2%, plus 2%-yielding Caledonia Investments and Global Smaller Companies Trust, with a 1.7% yield.
You may wonder how an investment trust can grow its dividend each year for 54 years on the trot, as Global Smaller Companies Trust has, and still only yield 1.7%.
The answer is that dividend yield is a function of dividend per share and share price.
So although the dividend per share has grown consistently for decades, the share price has moved up too. Indeed, Global Smaller Companies Trust has seen its share price move up 39% over the past five years alone.
1966 and all that
That share price performance is not as good though as another of the five shares: City of London Investment Trust (LSE: CTY). This investment trust has hit an all-time high this month, having risen 55% over the past five years.
It has also grown its dividend per share annually since the last time England won the World Cup. Sadly for footie fans, though more happily for the trust’s investors, that means annual dividend per share increases stretching all the way back to 1966.
Of the five investment trusts I mention here, it also has the best yield right now – by some distance. At 4.3%, it is close to double any of the other four as well as handily beating the current FTSE 100 yield of 3.4%.
Sticking to the basics
How has it managed to achieve that? The trust’s approach is quite simple. Its stated objective is “to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange”.
Like any share, what the board of directors aims to do is no guarantee that it will achieve it. Dividends are never guaranteed, even though the board notes that it “fully recognises the importance of dividend income to shareholders”.
As the objective shows though, City of London has a fairly simple strategy focused on British blue-chips. Right now, for example, its top five holdings are FTSE 100 heavyweights: HSBC, Shell, British American Tobacco, BAE Systems and RELX.
One risk of such a strategy is that it means City of London is heavily exposed to the UK economy. If it performs weakly or the London market takes a tumble, City of London’s share price could fall. So too may the income streams it uses to fund its own dividends.
But I like the simplicity of the strategy and clear focus on dividend income. I see it as an investment trust investors should consider.
