City of London Investment Trust (CTY)

NedS

Thrugelmir said:

 NedS said:

I've held CTY on and off over the years and built a sizeable holding during the Covid crash, and of course the number one question is whether that 6% dividend yield is going to be sustainable.

Reading this week's year end results, I'm feeling more confident:

Reading the annual results most likely not.  When the market is yielding 3-4% , only way to sustain a 6% yield is out of capital reserves. 

Yield is a function of price, and yields rise as prices fall hence why CTY's yield is high at the moment. The market yield of 3-4% is lower than it has been because of Covid-19 with a large number of dividend paying companies either reducing or suspending their dividends as a result. Being an IT, with cash reserves, CTY has not had to reduce it's dividend.

CTY had revenue reserves in the order of £58.3 million, and used £14.4 million of these reserves to sustain the dividend this last financial year. On that basis, they could afford to support the current dividend for a further 3 years should the dividend drought continue at it's present level, before needing to dip into capital reserves, of which they have £271.8 million. The board have made it very clear they expect to not only maintain the current dividend, but to increase it again this financial year, and the statement of accounts clearly shows they have the resources to achieve that. Will those resources run out before dividend income revenue returns to a level able to fully fund the dividend payout, who knows? But with the clear commitment from the board and backed with revenue reserves, I view CTY as an add/buy should we see further share price drops due to any second wave. In my view the offer of a fairly safe 6% (rising) income and the long term possibility of capital gain when markets eventually recover makes CTY a solid income play.

NedS

itwasntme001 said:

gollum007 said:

itwasntme001 said:

Seems like a very poor trust to select as part of your asset allocation.  Comparing it to the FTSE100 index tracker, it does not seem to have even beaten that over the last 5 years.  I held a FTSE100 tracker myself and luckily sold out at the highs locking in a total return of nearly 40%.

And you've completely missed the point of this investment. Total returns aren't everything by a long shot, just the current fashion......

The reason I suspect most have invested in CTY and similar is the long standing record of dividend increases at or above inflation. With this sort of trust, it's not the total return you're worried about, but the reliable ongoing income stream.

Total return is all that matters in anything and it always has been.  The idea of just buying for the dividend and not caring about what happens to the capital value is just absurd.  If i buy a property yielding me £x a year and the capital value falls 50% but the yield is still £x and rising each year, I damn well care that I just lost 50% of my capital (assuming unleveraged).  Same goes for stocks.

Taking an income from stocks doe snot have to be only from dividends.  It can be done from selling one or more shares.

It's not absurd if you want a steady income and do not want to be worried about selling capital to generate income at a time when the market has just plummeted 50%. A steady 6% income rising over time regardless of market conditions sounds attractive to me.

Bravepants

NedS said:

itwasntme001 said:

gollum007 said:

itwasntme001 said:

Seems like a very poor trust to select as part of your asset allocation.  Comparing it to the FTSE100 index tracker, it does not seem to have even beaten that over the last 5 years.  I held a FTSE100 tracker myself and luckily sold out at the highs locking in a total return of nearly 40%.

And you've completely missed the point of this investment. Total returns aren't everything by a long shot, just the current fashion......

The reason I suspect most have invested in CTY and similar is the long standing record of dividend increases at or above inflation. With this sort of trust, it's not the total return you're worried about, but the reliable ongoing income stream.

Total return is all that matters in anything and it always has been.  The idea of just buying for the dividend and not caring about what happens to the capital value is just absurd.  If i buy a property yielding me £x a year and the capital value falls 50% but the yield is still £x and rising each year, I damn well care that I just lost 50% of my capital (assuming unleveraged).  Same goes for stocks.

Taking an income from stocks doe snot have to be only from dividends.  It can be done from selling one or more shares.

It's not absurd if you want a steady income and do not want to be worried about selling capital to generate income at a time when the market has just plummeted 50%. A steady 6% income rising over time regardless of market conditions sounds attractive to me.

Do you still feel the same about the RDSB shares you bought back in March, when the yield was 8%?

LHW99

itwasntme001 said:

gollum007 said:

itwasntme001 said:

Seems like a very poor trust to select as part of your asset allocation.  Comparing it to the FTSE100 index tracker, it does not seem to have even beaten that over the last 5 years.  I held a FTSE100 tracker myself and luckily sold out at the highs locking in a total return of nearly 40%.

And you've completely missed the point of this investment. Total returns aren't everything by a long shot, just the current fashion......

The reason I suspect most have invested in CTY and similar is the long standing record of dividend increases at or above inflation. With this sort of trust, it's not the total return you're worried about, but the reliable ongoing income stream.

Total return is all that matters in anything and it always has been.  The idea of just buying for the dividend and not caring about what happens to the capital value is just absurd.  If i buy a property yielding me £x a year and the capital value falls 50% but the yield is still £x and rising each year, I damn well care that I just lost 50% of my capital (assuming unleveraged).  Same goes for stocks.

Taking an income from stocks doe snot have to be only from dividends.  It can be done from selling one or more shares.

Logically, total return versus dividend should produce the same result over the long term - as long as you do not want to take out more than would be returned as dividends.

As you said originally " I held a FTSE100 tracker myself and luckily sold out at the highs locking in a total return of nearly 40%."

Had you not been lucky, you could probably still be looking at a capital loss. Surely, you only need to care about a capital loss, at the point you actually sell (whether property, stocks, fine art whatever).

If you can enjoy life on the dividends received, great. If you cannot, you need growth stocks in order to be able (hopefully) to extract more. However, you are likely to see wider fluctuations in these than in dividends, and if you need money to live, and have to sell stocks to obtain it when values have fallen you will incur a capital loss, and perhaps have issues going forward - the dreaded "sequence of returns" problem.

westy22

I can fully understand the attraction of dividend income streams in the days when selling shares was both time consuming and expensive but today, when selling shares is instantaneous and usually costs less than £10, I'm far less convinced. Total Return is certainly my target.

Prism

NedS said:

Being an IT, with cash reserves, CTY has not had to reduce it's dividend.

CTY had revenue reserves in the order of £58.3 million, and used £14.4 million of these reserves to sustain the dividend this last financial year.  

Just to be clear, cash reserves and revenue reserves are not the same thing. CTY pays its dividend by ensuring it has the cash to do so just before it pays it. That cash can be obtained with loans or gearing, by holding a cash account or by selling equities. Having a holding in cash has no affect on the dividend.

The revenue reserves are typically not held in cash. They represent dividends that have been collected over the years from the holdings which were held back rather than being paid out. These are typically reinvested to get them working for the trust. Keeping them back in cash would be a drag.

Trusts like CTY handle all this stuff for an investor which is certainly worth something but only if the total return isn't too far off the benchmark.

NedS

Prism said:

Trusts like CTY handle all this stuff for an investor which is certainly worth something but only if the total return isn't too far off the benchmark.

or the investment meets your needs. I will (hopefully) have a DC pot of around £300k when I retire and would like an annual income of around £15k from it. I could invest for growth and draw down £15k per year and hope I never run out of money (30-40 years), or I could invest in CTY, take £18k dividend (or £15k, and reinvest £3k) and never need to touch my capital. I don't see many people recommending a 5-6% drawdown rate.

Thrugelmir

NedS said:

itwasntme001 said:

gollum007 said:

itwasntme001 said:

Seems like a very poor trust to select as part of your asset allocation.  Comparing it to the FTSE100 index tracker, it does not seem to have even beaten that over the last 5 years.  I held a FTSE100 tracker myself and luckily sold out at the highs locking in a total return of nearly 40%.

And you've completely missed the point of this investment. Total returns aren't everything by a long shot, just the current fashion......

The reason I suspect most have invested in CTY and similar is the long standing record of dividend increases at or above inflation. With this sort of trust, it's not the total return you're worried about, but the reliable ongoing income stream.

Total return is all that matters in anything and it always has been.  The idea of just buying for the dividend and not caring about what happens to the capital value is just absurd.  If i buy a property yielding me £x a year and the capital value falls 50% but the yield is still £x and rising each year, I damn well care that I just lost 50% of my capital (assuming unleveraged).  Same goes for stocks.

Taking an income from stocks doe snot have to be only from dividends.  It can be done from selling one or more shares.

It's not absurd if you want a steady income and do not want to be worried about selling capital to generate income at a time when the market has just plummeted 50%. A steady 6% income rising over time regardless of market conditions sounds attractive to me.

Sounds as if you are overly focused on the yield. 

NedS

Bravepants said:

NedS said:

itwasntme001 said:

gollum007 said:

itwasntme001 said:

Seems like a very poor trust to select as part of your asset allocation.  Comparing it to the FTSE100 index tracker, it does not seem to have even beaten that over the last 5 years.  I held a FTSE100 tracker myself and luckily sold out at the highs locking in a total return of nearly 40%.

And you've completely missed the point of this investment. Total returns aren't everything by a long shot, just the current fashion......

The reason I suspect most have invested in CTY and similar is the long standing record of dividend increases at or above inflation. With this sort of trust, it's not the total return you're worried about, but the reliable ongoing income stream.

Total return is all that matters in anything and it always has been.  The idea of just buying for the dividend and not caring about what happens to the capital value is just absurd.  If i buy a property yielding me £x a year and the capital value falls 50% but the yield is still £x and rising each year, I damn well care that I just lost 50% of my capital (assuming unleveraged).  Same goes for stocks.

Taking an income from stocks doe snot have to be only from dividends.  It can be done from selling one or more shares.

It's not absurd if you want a steady income and do not want to be worried about selling capital to generate income at a time when the market has just plummeted 50%. A steady 6% income rising over time regardless of market conditions sounds attractive to me.

Do you still feel the same about the RDSB shares you bought back in March, when the yield was 8%?

Haha, yes, I got nailed on those and took a loss on that trade. Overall Shell has done me well over the years so I can't complain too much.

Bravepants

I must say I like the idea of dividends for income, but I wouldn't go all-in with ITs. I have a growth fund in my ISA based on VLS 60 and FTSE Global All Cap, from which I intend to draw 3 to 3.5% per annum from when I retire taking advantage of total return. This will supplement a DB pension, and a cash SIPP.  However, I also have a small income portfolio consisting of CTY, MYI, MRCH and RDSB (I got nailed too NedS! Hehe! Really should have seen it coming!); total yield across everything is currently showing 4.7% for me bu I only really want 3 to 3.5%. Yes, the capital will go up and down, but as long as I show a yield over 3% then I'm not too bothered about what happens to the capital as it's a small percentage of my total portfolio.

I could of course buy additional DB pension, in which case I would not have access to the capital ever again, BUT the result would be an income analogous to an equivalent yield - about 4.7% to 5% if I take it actuarially reduced.

So, I have a quandrary...buy extra pension and not have access to the capital but have a guaranteed index linked "yield" for a pension I will draw in a couple of years time, OR buy IT's now that they are cheap for an equivalent yield but still have access to (hopefully most!) of the capital if I should need it (which I probably won't)?

If nothing else buying ITs for dividend income adds a bit of fun into my investment career!