Interactive Investor

City of London cites record as it unveils below-inflation dividend rise

The popular UK equity income investment trust has raised its dividend again, but it’s a below-inflation rise. However, over 10 years, its income payouts are comfortably ahead of price rises. Kyle Caldwell reports.

20th September 2023 12:53

Kyle Caldwell from interactive investor

City of London (LSE:CTY) investment trust’s remarkable dividend run has extended to 57 consecutive years.

The popular UK equity income investment trust, managed by Job Curtis (pictured) since 1991, had already guided to the market that it would increase its yearly dividend by 2.6%. In its financial results, which were released today, this was confirmed, with dividends per share rising from 19.6p to 20.1p.

However, a 2.6% rise is notably below the current rate of inflation, with the latest figures for August, which were released this morning,  showing the Consumer Prices Index (CPI) is running at 6.7%.

In its annual results, Sir Laurie Magnus, chair of City of London, acknowledged that the dividend increase is “considerably lower than inflation”, but pointed out that over the long term the investment trust’s dividend increase has outpaced rises in the cost of living.

Sir Laurie said: “Although our dividend increase was considerably lower than inflation over the 12 months, City of London has increased its dividend by 40.6% over the last 10 years compared with a cumulative increase in UK CPI inflation of 33.5%. The board fully understands the importance of growing the dividend in real terms through the economic cycle." 

He also pointed out that the 57-year dividend track record has been achieved during periods of high and low inflation and, at times, political instability in the UK and overseas. Our portfolio has, at its core, good-quality and cash-generative companies that are well placed to deliver reliable and competitive returns.”

In terms of performance over its financial year (which runs to the end of June 2023), City of London fell short of the FTSE All-Share Index, the benchmark it measures itself against. Its share price total return was 4.1% and its net asset value (NAV) delivered 4.5%. In contrast, the FTSE All-Share rose by 7.9%.

However, as its chair points out, over three, five and 10 years, City of London’s NAV performance is ahead of the FTSE All-Share Index.

Stock selection was responsible for detracting 4.3 percentage points of performance. The biggest laggard was Direct Line Insurance Group (LSE:DLG), which unexpectedly cut its dividend at the start of 2023.

Other stocks highlighted as underperformers over the period were housebuilder Persimmon (LSE:PSN), and Verizon Communications (NYSE:VZ), the US telecommunications provider.

Curtis has introduced six new holdings over the 12-month period: Glencore (LSE:GLEN), DS Smith (LSE:SMDS), Morgan Advanced Materials (LSE:MGAM), NatWest Group (LSE:NWG), Vesuvius (LSE:VSVS) and investment trust Round Hill Music Royalty (LSE:RHM)

Also of note was that Curtis sold Microsoft (NASDAQ:MSFT), which had been in the portfolio since 2011. He says that its valuation “seemed expensive relative to prospects and other opportunities”.

Curtis also said: “At the time of the final sale of the portfolio's holding in Microsoft, its market capitalisation was almost equal to all of the stocks in the FTSE 100 index combined.

In August, we published two video interviews with Curtis, which can be viewed via the two links below:

In the interview, Curtis ran through recent portfolio activity, and named the main sector he expects to benefit from a higher-for-longer interest rate environment.

He also explained why dividends investors are being “paid to wait” while sentiment towards UK equities remains low.

City of London is one of interactive investor’s Super 60 investment ideas.

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