The trust, which aims to produce a yield 15 to 30 per cent higher than that of the FTSE All Share, has almost reached £1bn in size following strong investor appetite this year – a possible consequence of the retail distribution review (RDR) increasing the visibility of investment trusts as an option. City of London invests predominantly in large cap stocks, with 76 per cent in that part of the market, and this, along with its size, makes it easier to comprehend for investors who might be wary of the complications of trusts.
Despite this weighting to the large end of the market it has managed to outperform the FTSE All Share over the past three years, with returns of 53.95 per cent to the index’s 35.28 per cent.
Performance of trust versus index over 3yrs
Source: FE Analytics
Curtis says that there are plenty of big dividend-paying stocks which are still under-valued by the markets. Here are some of his favourites.
Utilities
“The market has over the years underestimated the utilities,” Job said. “We own the last three nationalised utilities left.”
“They have regulated revenues linked to inflation and the remaining utilities deserve a premium.”
Curtis owns Centrica and SSE in his top 10 while National Grid is the 11th biggest position.
Performance of shares versus FTSE 100 in 2013
Source: FE Analytics
Some investors worry about the level of debt these companies take on, but Curtis says it fits with the business model.
“It’s desirable for the utilities to have debt. They are encouraged by the regulator to have 60 to 70 per cent of gearing as it’s cheaper for them to borrow then fund from equity.”
“Some people say dividends are being paid out of debt. There’s no doubt capex would be funded by debt but they are allowed a certain return provided they meet efficiency requirements.”
One concern raised about the sector is that it could suffer when bond yields go back up and investors who are seeking income shift back into gilts, but Curtis says this doesn’t concern him in the long run.
“Utilities do suffer when bond yields go up. Because they are funding capex through borrowing and tend to borrow in fixed interest markets there are valid reasons they should suffer, although it’s a knee-jerk reaction.”
Curtis says that rumours of M&A activity in the sector suggest that longer-term investors are looking past these factors.
Centrica is yielding 4.4 per cent, SSE 5.6 per cent and National Grid 5.5 per cent.
Vodafone
Curtis says that Vodafone’s windfall from the sale of its stake in Verizon Wireless has finally rewarded investors for their patience.
Performance of share versus FTSE 100 in 2013
Source: FE Analytics
However, the story is not over for this stock, Curtis says, which is in an even better position for dividend investors and could even be a takeover target itself.
“The dividend cover is now much better as you have lost 50 per cent of the share capital,” he said.
“There’s a rumour that AT&T could look to buy it so I will sit on my holdings.”
Curtis says he is reinvesting the dividend he received from Vodafone across the portfolio rather than just into Vodafone.
Vodafone shares are yielding 4.6 per cent.
Royal Dutch Shell
Curtis says that both BP and Royal Dutch Shell look cheap.
However, it is too early to buy back into the former with legal contests still rumbling on in the US over compensation for the Gulf of Mexico disaster.
“We are still underweight BP relative to the index,” he said. “It’s cheap but the value won’t be realised until they agree a resolution with the US. It that’s in line with market expectations it will be cheap.”
The manager says that BP will be a very attractive stock if that court action is resolved favourably for the company, with the resolution of its problems in Russia a massive boost, however, the time to buy will be when or if that occurs.
Shell, on the other hand, he thinks is undervalued by the market, praising the dependability of its performance.
The manager has 5.1 per cent of his portfolio in the company despite its recent underperformance and he is happy to add to it on weakness.
Performance of shares in 2013
Source: FE Analytics
“Shell hasn’t cut its dividend since the second world war when they had issues with their assets in Europe,” Curtis said. “It’s a company with low gearing that has been investing heavily in recent years.”
The shares are yielding 5.3 per cent.
Banks
Curtis holds 5.8 per cent of his portfolio in HSBC, making it the single largest holding.
“It has a very attractive dividend,” he said. “I think the growth in the dividend will be above inflation.”
The manager rates it for its high exposure to the Asia Pacific region in particular.
He is less attracted to Lloyd’s, however, which is a popular choice for those looking for a recovery stock in the UK – US fund managers in particular are using it that way, he says.
Curtis says he won’t consider it until it starts paying a dividend, but in the meantime he thinks Barclays has better prospects, as its share price is much cheaper than Lloyd’s when compared to the book value of its assets.