Yahoo Finance 'Owning defence stocks isn't unethical – we'd be at the mercy of Putin without them'
City of London is a rare breed in the world of investment trusts: it boasts an unequalled track record of raising its dividend for 55 consecutive years.
The £1.9bn trust invests in dividend-paying British shares and has become a staple holding among DIY investors thanks to its stable returns and attractive yield of 4.6pc. Over the past five years it has returned 27pc, against 28pc from rivals.
Job Curtis, who has managed the fund for more than 30 years, tells Telegraph Money how he will keep its income record going as dividend growth in the London market starts to wane.
He also explains why his investment in BAE Systems has paid off in recent months, following Russia’s invasion of Ukraine, and why funds that invest in line with environmental, social and governance (ESG) or ethical criteria should reconsider their stance on the defence stock.
How do you pick stocks?
I aim to invest in good-quality companies that can grow their profits and dividends over the long run – and I like to pay a reasonable price for them.
It’s also no good being in a company that is over-paying its dividend and not investing enough for the future. I like companies with strong balance sheets, particularly those in industries whose fortunes are tied to the economic cycle.
What is your outlook for dividends?
We will see low-single-digit dividend growth for the next few years, rather than what we had last year. Dividends rose by 46pc in 2020‑21 but this was mainly because banks couldn’t pay out during the first lockdown.
This year will be different. Payouts will rise but in a much more steady fashion; one prediction is just 5pc. Banks and insurers will lead the way and, now that the oil price is above $100 a barrel, BP and Shell will grow theirs, too.
Mining stocks have benefited from higher commodity prices and are paying higher dividends, but I question the sustainability of that. The cost of living crisis might put pressure on some of the domestic consumer stocks.
How has the fund increased its dividend for 55 consecutive years?
Owning quality companies that are also able to grow payouts. But the investment trust structure is also helpful. We can build reserves during the good years and draw on them in challenging times.
We have done this in nine of the 30 years I have run the trust; in the other 21 years we added to them. In 2020 payouts from stocks declined by around 35pc, so we could not have continued to grow our dividend without our reserves.
Right now though, our earnings per share are higher than before the pandemic, so we’re in good shape. We have enough reserves to pay the annual dividend 3.5 times and I don’t think we’ll need to use them to keep growing it.
Are you an ‘ethical’ investor?
We factor it in when deciding whether a stock is cheap or not. British American Tobacco, for example, is never going to be on the same valuation relative to earnings as Unilever because it’s deemed to be unethical as a result of the damage smoking does.
Sometimes stocks look cheap and offer such attractive opportunities for income and capital growth and once you factor in the ESG risks they can be worth owning. That is my view on BAT, which is yielding 7pc.
When you engage with these companies, they are very serious about pivoting their products to less harmful ones. We are able to engage with companies such as BAT because we are a shareholder, but if you don’t own the shares there is no reason the company should listen to you.
What has been your best investment?
BAE Systems, the defence firm, is one of the best performers over three years – a beneficiary of geopolitical risks following Russia’s invasion of Ukraine.
I felt it was very good value for a long time. It had been a bit accident-prone over the years but the current management have done a great job. As is the case with a lot of British stocks, it traded at a discount compared with international peers.
It’s difficult to understand why some ethical funds exclude BAE Systems: if you don’t have companies making good defence equipment, we will be at the mercy of tyrants such as Vladimir Putin.
And your worst?
I bought Carnival, the cruise line, in a different era. It performed very poorly during the pandemic and had to raise a lot of money. I think the recovery is going to take a long time, particularly a return to paying dividends, so I sold it during the second half of 2020 and took a loss.
