City of London: the stocks powering our dividend growth

Job Curtis, who runs the City of London Ord (LSE:CTY) portfolio, outlines the factors (and sectors) he expects to help maintain the investment trust’s record of dividend increases.

But he also tells interactive investor’s Dave Baxter why he’s not tempted by a ‘flawed’ dividend strategy turning the eye of other investors.

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

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

Dave Baxter, senior fund content specialist at interactive investor: Hello and a very warm welcome to this Insider Interview. My name’s Dave Baxter, and joining me today is Job Curtis, manager of City of London Investment Trust. Job, thank you for coming in today.

Job Curtis, manager of City of London Investment Trust: It’s a pleasure.

Dave Baxter: So, Job, for people who don’t know, City of London is a UK income fund. It seeks out some of the juicy dividends in the markets. But if I look at your fund literature, you do hold some of those stalwarts, your Shell (LSE:SHEL)s, HSBC Holdings (LSE:HSBA)s, and so on. In that context, what actually sets you apart from other UK income funds?

Job Curtis: Well, I think we’re particularly known for our dividend growth record. We’ve grown our dividend every year for 59 years in a row, and we’ve benefited from the investment trust structure, which has enabled us to do that as well as a core of consistent companies.

But we have a total return objective, so income and capital growth, and we’ve beaten the index over the long term with a conservative investment strategy, and I think we’re well known for that as well.

Dave Baxter: It’s been an interesting 2025 for UK markets. What notable portfolio changes have you made?

Job Curtis: In 2025, we’ve particularly benefited from our position in the bank sector, which about two years ago, having been quite low in banks ever since before the financial crisis, we moved to an overweight position in banks. That was taking a view about something called the structural hedge, which are the balances that the banks hedge out on a kind of five- to seven-year view, which the UK banks do quite conservatively.

These hedges were taken out when interest rates were ultra-low and are now being rolled over into much more attractive interest rates. This is a kind of tailwind to profits, which in our view, was being underestimated by the market. We have seen very strong performance by the bank sector against that context.

In terms of the main change, we’ve seen takeover activity in our portfolio in particular, for example, Direct Line, the insurer, was taken over by Aviva (LSE:AV.), which we already held, and we bought Admiral Group (LSE:ADM) in kind of replacement for that, so a very good motor insurer. Dowlais Group (LSE:DWL), which is a motor component stock, was also taken over. So, we’ve seen takeovers.

We quite like real estate investment trusts (REITs) at the moment, and one we’ve bought is Big Yellow Group (LSE:BYG), the storage company, which very soon after we bought it, received a takeover approach from Blackstone.

So, I would say the main theme, really, has been our position in financials and the banks, which has been helpful to both capital performance and dividend growth in the portfolio.

• The Income Investor: does BP have dividend investing appeal?
• Pros weigh in: does UK rally have legs and are shares still cheap?

Dave Baxter:You have a very long history of dividend increases, and of course there will be pressure to keep that up. What’s going to drive those increases? And have you considered an enhanced dividend policy where you use, for example, capital growth or revenue reserves in order to just keep those payouts rising?

Job Curtis: No, we’ve been very clear that we are not going to do an enhanced dividend policy. In our chair’s statement recently, we made absolutely clear that the board is firmly against that.

We think when everything’s going up, people don’t notice that a bit of the dividend’s paid out of capital. But we think in flat or declining markets, shareholders will be very upset to see that part of their dividend is being paid out of their own capital. It’s like robbing Peter to pay Paul, and we just think it’s a flawed strategy, which hasn’t been tested in bear markets, and we will have another bear market at some point.

So, we definitely intend to continue to pay our dividend out of the dividends we receive, and we certainly are very comfortable with that strategy. We’re seeing decent dividend growth across a lot of our portfolio and are confident we can build on our record.

But as I said earlier, we do use the investment trust structure in difficult years for dividends, such as during Covid when FTSE 100 dividends went down by 36%.

We carried on growing our dividend, and we did it because in the good years [you] can put money into the revenue reserve, up to 15% of the earnings, and that builds the revenue reserve up, and then you use that in difficult years for dividends. So, that is an advantage investment trusts have over open-ended funds.

Dave Baxter:You do hold some lower-yielding shares, for example BAE Systems (LSE:BA.), alongside the bigger payers. What sort of names are you holding and why?

Job Curtis: Yes, BAE was more of a medium yield when I built the holding up. Then with the Ukraine war, we were in a new era, the post-Cold War peace dividend is kind of over and countries are rearming, and BAE has got heaps of good technology and is in an incredibly strong position.

It may be the UK’s biggest defence contractor, it is also the sixth-biggest in America, and has huge, important positions in Europe, in Asia Pacific, countries like Japan and Australia, and in the Middle East. So, it’s a very strong company and has re-rated. We have taken some profits in it.

Another very good example of a low yield we hold is RELX (LSE:REL), which is in our top five holdings. This is a provider of business information, analytics, essential information for insurance companies as they measure risk of underwriting, or legal firms, [they are] the biggest second publisher of legal material globally, including America.

They’re already using artificial intelligence (AI) in services they provide to their clients. They’re also the biggest scientific publisher in the world. So, it provides essential information for professionals and businesses, and also has an exhibitions business.

So, it’s a really high-quality company with a strong moat around its business and has performed very well over the years, and we have a lot of confidence in it and have maintained it as a big holding.

If you look at our portfolio, we’ve got some stocks in there more for their yield, the yielders, where you might get pleasantly surprised by a re-rating, possibly. But we’re confident that the dividend will be paid and be grown.

But there are other companies in the portfolio like BAE and RELX, which are more in for the capital growth. They still pay a dividend, which is growing, but it’s obviously on a much lower level. But it’s a balancing act and having enough of the high yielders and also the low yielders as well.

• Ian Cowie: my take on Saba’s latest attack on Edinburgh Worldwide
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Dave Baxter:Like some of your peers, you do fish in overseas markets as well. What kind of overseas shares have earned a place in the portfolio?

Job Curtis: It’s important to say that the UK stock market, although companies are listed in London, they are actually very global. If you drill down into our portfolio, which is over 90% UK-listed shares, some 60% of the underlying sales are overseas. So, you’ve got major companies like Shell or Unilever (LSE:ULVR), which are completely global companies that happen to be listed in London.

But in addition, we can access overseas listed shares. We’re allowed to go up to 20% of the portfolio. A few years ago, it was up to about 17%, but I’ve actually reduced it down to about 7% because there’s so much more value in the UK market at the moment.

The UK market, in my view, is offering exceptionally good value relative to overseas markets. So, it’s at quite a low ebb.

But to give a couple of examples. TotalEnergies SE (EURONEXT:TTE) is the French-based oil company, and in 2020, both Shell and BP (LSE:BP.) cut their dividends, sadly. And while Total didn’t, it continued to grow its dividends. So, we switched some of our Shell at that point into Total. We’ve still got a big position in Shell, but we’ve maintained Total as this kind of a third string major oil company.

Another example is Munchener Ruckversicherungs-Gesellschaft AG (XETRA:MUV2), which is a big German-based global reinsurance company, which has done very well on the back of strong market-free insurance.

We have got some interesting Lloyd’s insurance plays in the portfolio, such as Beazley (LSE:BEZ) and Hiscox Ltd (LSE:HSX), but they’re more niche and smaller, while MunichRe has also added to what is quite a big position in the reinsurance sector in the portfolio.

Dave Baxter: And, finally, our normal question, do you have skin in the game?

Job Curtis: Yes, I’m very happy and pleased to say that I’ve got some 313,000 shares, which are worth about £1.6 million in today’s share price. 

Dave Baxter: Job, thank you for your time.

Job Curtis: Pleasure.

Dave Baxter: So, that’s it from us. Many thanks for watching. Do let us know what you think in the comments, and if you enjoyed this series, do hit the like button and the subscribe button. Take care.