Shore up your dividend stream with City of London

With interest rates at historically low levels and concerns over bonds, it is more difficult for investors to find a reliable source of income. One good solution could be an equity income investment trust. These can smooth their income payments by retaining up to 15 per cent of the income they receive to build a reserve. This means that in years when their investments pay out less in dividends the reserve can be used to plug the gap.

The management teams of these active funds can also seek out the best opportunities from across the UK market and beyond, and can avoid companies where the dividend looks vulnerable.

IC Top 100 Fund City of London Investment Trust (CTY) has increased its dividend for 49 consecutive years - the longest of any investment trust. It paid dividends of 15.3p over its last financial year - an increase of 3.7 per cent on the previous year - and it offers an attractive yield of 4 per cent. It also added £3.83m to its revenue reserve, which is now worth about £38.4m, or 12.5p a share.

And although it has a substantial reserve it does not need to dip into this every year because of its manager's ability to generate income. It last used its revenue reserve in June 2011, but only 0.2 per cent of it. The last significant use was in 2010, when it used 6.7 per cent.

The trust doesn't just rely on large-caps: while around two-thirds of its assets are in the FTSE 100 it also has exposure to smaller companies, and about 11 per cent of its assets are in non-UK companies, helping to differentiate the trust from other UK equity income funds.

UK equity income funds are often accused of being too similar, especially in their largest holdings. However, Job Curtis, manager of City of London, points to the fact that the trust's top 10 holdings do not account for much more than around a quarter of assets and that there is "plenty going on" outside the top 10 - including overseas holdings. He can also boost income in other ways, for example by using derivatives such as call options.

City of London has one of the lowest ongoing charges of all investment trusts at 0.42 per cent.

As well as paying an attractive level of dividends, City of London has made strong share price and net asset value (NAV) returns, beating the FTSE All-Share by a good deal over one, three and five years.

It doesn't beat its peer group average over three years, and in share price terms over five years. It also trades at a premium to NAV of nearly 2 per cent.

But the reason it doesn't always beat its peer group average is because of its large-cap bias: some of its peers are focused on mid-caps and smaller companies, and the FTSE 250 and FTSE Small Cap indices have recently outperformed the FTSE 100.

And City of London generally always trades at a premium, sometimes higher than where it is at present, so this is unlikely to fall much lower than where it is now for an extended period.

So with an unbeaten record of increasing its dividend and good total returns for a very reasonable charge, City of London Investment Trust looks like a good way to get reliable income even if the outlook is not promising for the broader UK market. Buy.

Source: Morningstar, *Henderson, **Winterflood.

Performance

Source: Winterflood as at 19 October 2015

Top 10 holdings, as at 30 September 2015 (%)

Sector breakdown (%)