Here is something for our UK readers. The concepts of passive income apply equally as well in the UK as anywhere. Today’s post is an example of a stock holding that I believe does this very well. This is not personal financial advice, its a factual example of a quintessential UK passive income stock holding.
The City of London Investment Trust (CTY) is a well-established UK investment trust that has been around since 1891. CTY is managed by Janus Henderson Investors and is listed on the London Stock Exchange. This article provides a summary of CTY as an example of a UK passive income stock holding.
Performance of CTY
CTY aims to provide long-term growth in income and capital to its shareholders.
This is exactly the type of holding I talk about in this article here for long term income growth. The trust has a strong track record of achieving this objective, having increased its dividend for 56 consecutive years (and counting). This makes CTY one of only a handful of investment trusts in the UK with such an impressive record.
Over the past 10 years, CTY has delivered an average annual return of 10.5%, outperforming both its benchmark, the FTSE All-Share index, and its peer group. The trust’s NAV total return has increased by 192% over the same period, compared to the FTSE All-Share’s total return of 133%. This outperformance can be attributed to the trust’s focus on dividend-paying companies, which have historically outperformed non-dividend payers. These figures were correct at time of writing but updated info can be found here.
CTY’s income yield is currently around 4.5%, which is higher than the FTSE All-Share’s yield of 3.4%. This income stream is derived from the trust’s portfolio of high-quality dividend-paying companies, which includes well-known names such as GlaxoSmithKline, British American Tobacco, and Royal Dutch Shell.
Portfolio of CTY
CTY’s portfolio is focused on UK equities, with a bias towards large-cap stocks. The trust’s top ten holdings account for around 40% of its total portfolio, with the largest holding being GlaxoSmithKline, which makes up around 6% of the portfolio.
CTY’s investment strategy is centered around identifying high-quality companies that have a strong track record of paying dividends. The trust’s investment team conducts extensive fundamental research to identify companies that are likely to continue paying dividends over the long term.
CTY’s portfolio is well diversified across sectors, with the largest sector weighting being financials, which accounts for around 22% of the portfolio. Other significant sector weightings include consumer goods, oil and gas, and healthcare.
CTY also has exposure to smaller companies, with around 10% of the portfolio invested in companies with a market capitalization of less than £1 billion. This exposure provides the trust with the potential for higher returns but also comes with higher risk. These figures were correct at time of writing but updated info can be found here.
CTY’s Prospects
This section is just my opinion – not qualified financial advice.
CTY’s investment approach has proven to be successful over the long term, and the trust’s management team is well-respected in the industry. However, as with any investment or company there are several risks and challenges that could impact the trust’s prospects.
Brexit uncertainty and the ongoing COVID-19 pandemic continue to pose risks to the UK economy and the companies in which CTY invests. Additionally, there is the risk that interest rates could continue to rise, which would make dividend-paying stocks less attractive to some investors.
However, CTY’s focus on high-quality dividend-paying companies with a long-term track record of growth should help the trust weather any short-term volatility in the market. The trust’s strong balance sheet, which includes a low level of debt and significant cash reserves, also provides a cushion in the event of any market downturn.
Using CTY for Passive Income
One of the main attractions of investing in CTY is the potential for generating a steady stream of passive income. The trust’s focus on high-quality dividend-paying companies has enabled it to consistently increase its dividend payments over the long term, providing shareholders with a reliable source of income.
CTY’s current dividend yield of around 4.5% is currently significantly higher than the average savings account or government bond in the UK, making it an attractive option for some investors looking to generate income from their investments.
Investors can choose to reinvest the dividends they receive from CTY or use them to supplement their income. By reinvesting dividends, investors can benefit from the power of compounding and potentially increase their long-term returns.
Alternatively, investors can use the dividends they receive from CTY to generate a regular stream of income. This can be particularly attractive for retirees or those looking to supplement their salary. The regular dividend payments can provide investors with a predictable and reliable source of income, which can help to reduce the impact of market volatility on their portfolio.
It’s worth noting, however, that there is no guarantee that CTY’s dividend payments will continue to increase at the same rate or even continue at all – despite the last 56 years. Economic and market conditions can impact the ability of companies to pay dividends, and CTY’s portfolio is not immune to these risks.
Investors should also consider the tax implications of investing in CTY for passive income. Dividend payments from CTY are taxed differently depending on the investor’s tax status and circumstances. It’s important to seek professional advice on the tax implications of investing in CTY to ensure that investors are making the most tax-efficient use of their investment.
In conclusion, CTY can be an attractive option for investors looking to generate a steady stream of passive income. The trust’s focus on high-quality dividend-paying companies and consistent track record of increasing dividends make it an appealing option for income investors. However, investors should be aware of the risks and tax implications associated with investing in CTY and seek professional advice where necessary. These details were correct at time of writing but CTY’s updated info can be found here.
The City of London Investment Trust (CTY) – Summary:
The City of London Investment Trust (CTY) has delivered long-term growth in income and capital to its shareholders with a strong track record of increasing dividends for 56 consecutive years. CTY has outperformed its benchmark and peer group over the past decade due to its focus on high-quality dividend-paying companies. CTY’s well-diversified portfolio of UK equities is managed by an experienced team and includes well-known names such as GlaxoSmithKline, British American Tobacco, and Royal Dutch Shell. While Brexit and COVID-19 pose risks to the UK economy, CTY’s investment strategy should help it weather any short-term volatility.
Passive income investors seeking income-generating UK equities might consider adding CTY to their portfolio, but of course only after they have done their own research.
In Conclusion
The City of London Investment Trust (CTY) has a long and successful history of delivering income and capital growth to its shareholders. The trust’s focus on high-quality dividend-paying companies has enabled it to outperform its benchmark and peer group over the long term. While there are risks and challenges that could impact the trust’s performance, CTY’s strong track record, well-diversified portfolio, and experienced management team should help it navigate any short-term volatility. Investors looking for exposure to high-quality UK equities with a focus on income should consider adding CTY to their portfolio.
If I were a resident of the UK, I would be certainly interested in doing further research into CTY, as it appears to align exactly with my goals as a passive income investor. CTY seems to certainly be a quintessential UK passive income stock.
I could imagine plenty of “old money” folk in the UK using CTY as one of their holdings providing part of their private incomes. Good on them I say!
Cheers
