Despite a swathe of dividend cuts and cancellations, City of London Investment Trust (CTY) raised its dividend by 2.2 per cent to 19p a share in respect of its last financial year – the 54th year in a row that it has done this. But as well as funding the dividend from the income it received from its holdings, the trust is drawing £14.4m from its revenue reserves, which were worth £58.3m or 11p a share at the end of its last financial year. City of London Investment Trust’s revenue earnings per share fell by 20.4 per cent, from 19.76p in the financial year ending on 30 June 2019, to 15.73p in the financial year to 30 June 2020.
Despite this the trust’s board plans to increase its dividend again in respect of its current financial year and the trust’s chairman, Philip Remnant, expects that this will again come from a combination of income from its holdings and the revenue reserve. He also highlighted the trust’s capital reserves from gains on sold investments that were worth £271.8m at the end of June – about three times the cost of the annual dividend.
UK investment trusts have been allowed to pay income out of capital since 2012, but City of London Investment Trust has never needed to do this to keep increasing its dividend. A benefit of drawing from revenue reserves and, if necessary, paying income from capital is that an investment trust’s managers are not forced to focus on higher-yielding shares. Mr Remnant says: “[Mr Curtis] can continue to focus on holdings selected for their above-average growth potential, albeit on lowish yields, some of which may well be listed overseas, providing greater diversification, and which have contributed positively to City of London’s outperformance over the years.”