City of London Investment Trust (LSE: CTY) is set to deliver a 49th consecutive annual dividend increase for its financial year ended 30 June 2015. And picking great dividend shares has helped City of London outperform the FTSE All-Share Index over the past three, five and 10 years.
The trust’s current top three heavyweight holdings are Royal Dutch Shell (LSE: RDSB), HSBC (LSE: HSBA) (NYSE: HSBC.US) and British American Tobacco (LSE: BATS).
Shell
The big news from top FTSE 100 oil company Shell this year has been the agreed (but yet to complete) mega-takeover of the Footsie’s no. 3 hydrocarbons firm BG Group. City of London reconsidered the investment case for Shell in light of this news, and decided it was favourable. The trust said: “We believe that it is a good strategic move by Royal Dutch Shell and so added to [our] holding in it”.
I think it’s hard to blame Shell for taking the opportunity presented by the current depressed oil environment to swoop for BG, although there are short-term implications for the dividend. Shell intends to hold this year’s payout at last year’s $1.88, and to pay “at least that amount in 2016”. The compensation for near-term lack of dividend growth is a whopping 6.6% yield. And, with Shell’s shares recently trading at multi-year lows, now could be a good time for long-term investors to buy.
HSBC
HSBC still has a lot of work to do in order to get firing on all cylinders. The banking giant may be over the worst of customer redress and regulatory penalties for past failings, but other costs also need to come down. HSBC needs to improve profitability, and to meet regulatory capital requirements at the same time as maintaining its progressive dividend policy. Analyst consensus earnings and dividend forecasts suggest the City experts believe HSBC can do this.
The bank increased its dividend by 2% last year, slowing from growth that had previously been running in high single digits. Analysts expect a continuation of modest dividend growth this year and next (supported by earnings growth), which isn’t to be sniffed at when the current yield is a chunky 5.6%. Put the attractive yield together with a forward price-to-earnings (P/E) ratio of 11 — well on the cheap side of the FTSE 100 long-term average of 14 — and HSBC appears to have solid value credentials.
British American Tobacco
British American Tobacco (BAT) has been an exemplary dividend stock for many years. Just at the moment, though, the company is experiencing a tough environment. Adverse exchange rate movements hit hard last year, such that reported revenue fell 8.4%. At constant exchange rates revenue would have been up 2.8%.
Analysts expect a further fall in revenue this year, before a pick up in 2016. Nevertheless, earnings forecasts support expectations that BAT will continue its long record of annual dividend increases. The company lifted the payout by 4% last year, and further mid-single-digit growth is forecast. While BAT’s P/E of 17.4 and prospective yield of 4.3% may not look as obviously attractive as the ratings of Shell and HSBC, I would say the defensive tobacco group merits its premium to the cyclical oil and banking companies.