An investment trust can be a straightforward way to diversify my investments. By buying shares in one investment trust, I can often get exposure to a wide variety of different companies.
Take City of London Investment Trust (LSE: CTY) as an example.
As of the end of last month, the trust had holdings in around 83 different companies. The trust’s portfolio is dominated by blue-chip British companies.
Its three biggest holdings are FTSE 100 heavyweights BAE Systems, RELX, and Shell. But it also has European, American, and Asian shares, such as Merck and Nestlé.
I’d consider buying
If I had spare cash to invest in my Stocks and Shares ISA at the moment, I would be happy to add City of London to my holdings.
I was therefore interested to read a note this week from Kate Marshall, lead investment analyst at Hargreaves Lansdown.
She highlighted three investment trust ideas for an ISA. City of London was one of them, alongside JPMorgan Emerging Markets Investment Trust and Scottish American Investment Company.
As Marshall pointed out in relation to City of London, “UK equity income investment trusts are a convenient way to invest in a mix of dividend-paying UK companies, and to access one of the highest-yielding stock markets in the world”.
That is also my feeling. At the moment, City of London offers a dividend yield of 5.1%.
On top of that, it has a stellar record when it comes to increasing the shareholder payout. City of London has grown its annual dividend for over half a century.
That track record makes it a Dividend Aristocrat.
Appeal and risks
But, as every savvy investor knows (or quickly comes to learn), past performance is not necessarily a guide to what will happen in future.
The trust’s third biggest holding, Shell, had itself not cut its dividend for over 70 years – until it abruptly did so in 2020.
Why is the UK one of the world’s highest-yielding stock markets?
It might be because it is an overlooked bargain, meaning share prices could rebound in coming years. But it could be because investors have growing concerns about the long-term competitiveness of the UK economy, for reasons ranging from low productivity to the erratic fiscal policy seen over the past several years.
As dividends are never guaranteed, what matters is how well companies are likely to do when it comes to generating free cash flows to support them.
Blue-chip exposure
Broadly speaking, I feel upbeat about that. City of London has a broad portfolio of many of the UK’s leading companies.
Its managers could make some duff choices, hurting returns. But hopefully, if they pick carefully, the trust can continue to pay a good dividend.
Over the past five years, the shares have fallen 4% while the FTSE 100 is up 8%. The trust shares now sell at a discount of 3% to their net asset value.
So I see this trust as an attractively valued way for me to increase exposure to a range of blue-chip British companies in my ISA.
