City of London leads dividend heroes with record 60-year run
David Prosser hails City of London’s unbroken run of dividend increases.
Celebrations are underway at City of London Investment Trust. The investment trust’s announcement in recent days of a 4% hike in its annual dividend takes it to 60 consecutive years of continual dividend increases. That’s the longest unbroken run of increases of all the Association of Investment Companies dividend heroes investment trusts – those funds that have raised their payouts every year for 20 years or more.
The fund has now raised its dividend in each and every year since 1966 – even during crises that have laid its investments low, from the oil shocks of the 1970s to the Covid pandemic.
How has the fund been able to reach this diamond anniversary? In part, City of London’s track record reflects the commitment of successive generations of managers and directors to providing a rising income stream – and the investment choices they’ve made for the fund’s portfolio accordingly.
An investor who put £1,000 into the fund in 1966 would have generated £55,900 of dividend income.
David Prosser
But City of London, like other investment trusts, also has a trick up its sleeve. While most collective investment funds are obliged to pay out all the income they receive on their portfolios each year to investors, investment trusts operate differently. They may retain up to 15% of this income, allocating it to a dividend reserve fund. This fund can then be used to boost dividends to investors in years when the portfolio is struggling to deliver the targeted income.
The effect is to smooth out income distributions over time. With judicious use of its dividend reserve fund, an investment trust can deliver consistent levels of income – or rising income in the case of City of London – even though the performance of its underlying portfolio may be much more volatile.
The flip side of this approach is that investment trusts won’t necessarily pay the highest dividends at a given moment. City of London, for example, currently yields around 3.9%; that’s handy, but it doesn’t shoot the lights out.
Still, for anyone relying on investment income – as part of their retirement income, perhaps – the dependability of the dividend matters more than its dimension. And in a world where financial markets are ever more uncertain and unpredictable, the security that a fund such as City of London has provided can be hugely reassuring.
It’s not the only option, of course. In all, the AIC now lists 21 dividend hero investment trusts. Also joining the list this month was BlackRock Greater Europe, with 20 years of successive rises. Three more funds – Bankers, Alliance Witan and Caledonia Investments – are poised to join City of London in the diamond league, since they’re currently on 59 years of annual increases.
Moreover, the dividend heroes are spread across a range of sectors – eight different sectors or geographies are represented on the list – so it is possible to build a portfolio of reliable income producers that spread your risk throughout different markets.
Over time, investors hope such a portfolio will deliver capital gains as well as income; this is important, not least because investment growth provides the foundations on which future income increases are built. And many investors will reinvest at least some of their income each year, increasing the size of their nest egg.
For now, however, this is City of London’s moment. The investment trust is rightly proud of being the first to reach 60 years of dividend increases; an investor who put £1,000 into the fund in 1966 would have generated £55,900 of dividend income since then, compared with £37,300 from the FTSE All-Share Index and £3,900 from cash held in a bank or building society account. Alternatively, with income reinvested, that £1,000 investment would now be worth more than £1.3m today.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
