Tritax

Even if consumer spending slows, I expect demand for warehousing to be fairly buoyant. That could be good news for warehouse specialist Tritax Big Box REIT (LSE: BBOX).

The shares have lost 36% of their value over the past year, meaning they now offer a dividend yield of 5.1%. A recession could lead to customers cutting budgets, which might be bad for Tritax. But the business seems to be in good health. In the first half, the contracted annual rent roll rose by 11% and the interim dividend grew 5%.

Tritax has a strong position in a sector I expect to see long-term structural growth. I would buy it for my portfolio today and hold it for the long term.

Games Workshop

One of the economic consequences of a recession can be that people spend less time and money on entertainment away from home, preferring the cheaper option of a night in.

That could be good news for Games Workshop (LSE: GAW). This FTSE 250 business makes money from roleplay games, both physically and online.

I think Games Workshop has a strong competitive advantage that could help it do well. It owns the Warhammer franchise, giving it pricing power and the benefit of a sizeable installed customer base.

I do see risks, such as the company’s concentration of manufacturing. If its main factory has a problem, that could hurt sales and profits.

But with its competitive advantage, 4.5% yield, and the prospect of robust demand, I would buy Games Workshop shares for my portfolio today and hold them during the recession.

City of London Investment Trust

Another of the FTSE 250 shares I would consider adding to my portfolio in a recession is the City of London Investment Trust (LSE: CTY).

Does it seem like a long time since England won the football World Cup? The year that happened (1966) saw the start of a run of annual dividend increases by the investment trust that remains unbroken.

At the moment, City of London has a dividend yield of 5.3%. Past performance is no guarantee of what will happen in future. But I like the trust’s focus on generating income for shareholders by investing mostly in UK companies, particularly large multinationals.

I think that makes sense, especially in a recession when large companies often have stronger experience and resources to ride out the storm than small ones. There is a currency risk to earnings due to a weaker pound hurting the sales prospects of many British exporters. That could reduce the value of some of the trust’s investments.

But I would tuck these shares in my portfolio and hold them through a recession and beyond.

For me, my dream was to retire early and spend time doing what I love, not just what pays the bills. And it was only through creating enough passive income that I was able to do so.

But, it can be tricky to find the right investments for my portfolio. These are two of my favourites that both play their part in letting me live my life how I choose to.

A growing dividend stable earner

City of London Investment Group (LSE: CLIG) have long been one of my favourite shares that I hold. I first bought this back in 2013 and every year since it’s paid out a chunky dividend. In fact, it’s grown by 9% on average since it started paying a dividend in 2007.

At the moment, it’s still trading down about 15% year to date, giving a historic-based dividend yield of around 7.8%.

If I didn’t already own plenty of these shares in my portfolio, I’d be happy to top up again.

A passive income diversified ETF

Next up, one of my favourite footsie-based ETFs, the not-so-catchily named iShares UK Dividend UCITS ETF (LSE: IUKD).

When I’m looking to live off my passive income portfolio, stability is good. And one way for me to achieve that is through this ETF. That’s because it invests in the top 50 individual high-yielding shares in the FTSE 350 after some basic screening.

If one company runs into issues and decides to cut their dividend, the average dividend yield will fall slightly. That’s much more manageable for me in terms of cash-flow than suddenly receiving nothing.

True, it comes with a slight cost for that benefit, but at 0.4% I think it’s reasonable for what I get.

Currently, it’s returning a potential dividend of around 6%, which I consider pretty good for something with those diversification upsides.

Again, it’s another I’d be happy to add to if I didn’t already own enough for my portfolio.

Playing the long game

At this point, you may be wondering if I’ve simply cherry-picked the passive income investments that have worked out best for me to make this article sound good.

The truth is, no, I own others that worked out better. And there are also those that turned out worse. The honest answer is that not all shares will work out — and that’s okay.

Because that’s why owning a diversified portfolio and holding onto it over the long term was the number one most important thing I did.

It was fundamental for growing my wealth in the first place. And then for turning that wealth into a passive income portfolio I now live off.

After all, I’m all about putting your money where your mouth is. And these tips helped me do exactly that.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

High yields, growing profits

First, City of London Investment Group (LSE:CLIG) has seen its share price fall 18.8% in the past year. It’s down 10.5% in the last three months. At the time of writing, the shares are trading at 420p.

Currently, the company has a dividend yield of 7.6%. Last year the global asset management firm paid a dividend of 33p per share. 

Using half of my allowance I could buy 2,380 shares. Multiply this by the dividend payment and I could be looking at a potential annual income of £785. 

It’s important to note, however, that dividend policies can be subject to change at some future date.

And funds under management fell to £7.6bn for the year ended June 2022. The year before, this figure stood at £8.3bn. This decline has been caused in a large part by rising interest rates and inflation.

Nevertheless, the business reported that net profit rose to £18.1m from £17m over the same period.  

Speedy earnings growth

Second, shares in Halfords (LSE:HFD) have fallen 52% in the last year and they’re up 17% in the past month. Currently, they’re trading at 170p.

For the year ended April, the motoring and cycling retailer paid a dividend of 9p. This equates to a dividend yield of 5.2%.

With my remaining £10,000, I could buy around 5,848 shares. Multiplied by the dividend per share, this results in an annual payment of £526.

Between 2018 and 2022, earnings per share (EPS) grew from 29.6p to 35.5p. By my calculations, this results in a compound annual EPS growth rate of 3.7%. While this isn’t particularly exciting, it’s consistent. 

It’s worth noting, however, that this growth is not guaranteed in the future.

There’s also the risk that the customer base continues to decline in the midst of the cost-of-living crisis. There’s a possibility that this could negatively impact future balance sheets.

On the other hand, revenue was up 6% year-on-year, to £1.37bn. This was largely due to the sale of products related to electric vehicles and e-scooters.  

Overall, my calculations suggest that I could get £1,311 per year in dividend payments by investing in these two companies. This is the equivalent of just over £100 per month. I find this attractive, and I’ll deploy this plan during the next tax year, when my £20,000 allowance resets.

It’s not like a Rio Tinto or Royal Mail, where it’s easier to understand what they do. But it is a long-standing favourite of mine, so let’s introduce it properly.

What does it actually do?

Known for convenience as CLIG, you might first think it’s just like any other fund manager. But there’s one key difference here, in that it specialises in closed-end funds.

Originally focused on emerging markets, it has since widened that scope geographically. That’s alongside including other specialist investment types, like REITs (real estate investment trusts).

Why do I highly rate this passive income payer?

Why I like this particular investment comes down to three main reasons:

Consistency: CLIG first started paying a dividend in 2007 and has never missed a year since, not even through the 2008 financial and 2020 pandemic respective crashes.

I find that very reassuring, and it tells me that management are committed to returning value to its investors.

Growth: Consistently growing a dividend is another trademark of a great passive income investment. CLIG, from its starting dividend of 10p, has grown, on average, around 9% per year.

While it wasn’t always a smooth rise, that’s an overall dividend growth rate I’m very happy with.

Diversification: Spreading your risk is important in any investment portfolio and by investing in CLIG, I can indirectly gain exposure to closed-end funds and REITs globally. As I’m low on those in my own portfolio, this means I’m unlikely to duplicate existing holdings.

Those are all great reasons, but, as ever, there are risks to consider, so let’s get into those now.

What are the concerns with City of London Investment Group?

I see two key risks to assess with this particular investment:

Dividend Cover: CLIG can be seen to have a low dividend cover rate over time. While it usually keeps to around 1.5, it did fall to a mere 1.01 in 2020. Since then, it’s recovered back to 1.19, with management forecasting a return to the 1.5 level.

Changes at the top: Barry Olliff, founder of City of London Investment Group, is due to retire from his directorship on 31 July. With several other board changes at the same time, there’s a risk of a change of direction or lack of focus on delivery.

Do I think City of London Investment Group is a good buy now?

I first bought CLIG back in 2013, at the now bargain-seeming price of £2.58p. Since then, alongside that consistent passive income stream, it’s risen to well over £5 at times.

Recently, like many shares, it’s fallen from those highs – down about 15% this year, to around £4.20p. At that price it’s now offering a healthy 7.5% dividend yield.

And while market-timing is not a game I play, I have taken the opportunity to add to that original purchase.

Because as a long-term Foolish investor, I want exactly the kind of passive income investment it offers. And I see no reason for that not to continue for several years yet.

After all, I grew up in an environment where stock markets were considered dangerous, risky. They were something that only rich people played with.

But now, after almost 10 years of investing, that first stock– and others like it — turned out to be a key step to retiring early in my forties.

How did I start investing in shares?

I’ll be honest, I only started thinking about buying shares when other options, like savings accounts, started cutting interest rates. The further they fell, the more I knew I would have to do something different if I wanted to continue to grow my wealth.

So, I got curious. I started learning about how stock markets worked. Sites like The Motley Fool and the like are full of useful information, and I devoured them.

I was reassured by the long-term performance of stock markets, which was vastly different to the off-putting screaming ‘buy/sell now’ over-hyped headlines.

For example, if you look at the FTSE 100 over all the different 10-year periods it has been trading, you will get a range of annual returns from -8.7% to +19%. But no individual 10-year period has ever lost an investor money.

That was hugely comforting. Plus, the average 10-year return was around a healthy 8.9%. It was time to take the plunge and buy my first ever stock.

What was my first ever passive income share?

It might surprise you to learn that my first ever passive income share was the perhaps lesser known company called City Of London Investment Group (LSE:CLIG).

Why this company? I liked its track record of dividend payments, and it had a clear strategy for the future that made sense to me.

It was also out of favour in the markets, far down from its 52-week high of ~£4. I ended up buying 558 shares at £2.49, giving a dividend yield near 10%.

In fact, if I add up all the passive income I’ve received through dividend payments, it’s more than I paid for the original investment! And that’s ignoring the fact I could still sell those shares today for a healthy profit.

Those numbers might not look much to some, but I’ve since added to this and other holdings over the years. And then that’s when the real ‘magic’ happens. Slowly and steadily, you end up owning a substantial, diversified, passive income portfolio.

The truth of risk and reward

Now, I’m not sharing this to boast about my investment success. That’s not my style and they don’t all work out so well. I’ve had my failures, too, for sure.

But the real point here is, yes, stock markets are risky. It’s one of the hard truths of investing – reward needs risk.

But by investing over the long term, those risks are far more in my favour, so long as I diversify my portfolio and choose wisely.  

And that’s why I’ll continue to invest in good companies for the long term – after all, it’s the Foolish way!

Why a Stocks & Shares ISA, though – wouldn’t a Cash ISA be safer for me? The problem is that even the highest paying Cash ISA (Gatehouse Bank five-year fixed term) only offers 2.1% currently. With today’s inflation rates, that’s effectively locking in a guaranteed negative return.

That doesn’t sound too good to me, especially as the daily cost-of-living crisis rumbles on.

Fortunately, as a Foolish investor, I’m looking to invest my cash for the long term. This means I’m ok with accepting a higher level of risk – with the hopes of a higher return.

What I want is a balanced portfolio, one that diversifies my risk across both income and growth-focused investments.

So, what do I invest in?

Beating inflation with tax-free passive income

If I were to pick one share for passive income right now, I’d go for City of London Investment Group (LSE: CLIG).

It has steadily increased its dividend yield by ~3.2% each year since the first payment in 2012. With its current level of ~6.8%, that’s much better than both cash and the FTSE 100 average dividend of ~3.5%.

Plus, by using my Stocks & Share ISA wrapper, I avoid ending up with an effective return of ~5.4% as a basic rate taxpayer. The more passive income I can keep, the better.

The risk I have with this share is its dividend cover level at ~1.2. That’s a little low for comfort. It is at least better than it was in ’20, so heading in the right direction now.

Adding growth with renewable energy

Tax-free income is great – but I also want to ensure I’m inflation-proofing my underlying capital by investing in sectors I expect to grow in the future.

And it’s difficult to ignore the renewable energy sector as an ever-increasing global market.

Renewable energy is a core interest of mine, having worked closely in the industry. It’s an area I want to be invested in.

But I think it’s still unclear who will be the biggest winners and losers as different technologies continue to compete.

For that reason, for now, I’m continuing to hedge my bets with IShares Global Clean Energy ETF (LSE: INRG)

I started investing in this exchange-traded fund back in 2017 but, despite the rapid increase since then, I’m continuing to hold for the future.

Support for renewable energy support is only growing as governments look to tackle their energy supply challenges, like with the UK Government’s Energy plan released last week.

This exchange-traded fund comes with a cost of 0.65% but I think that’s worth it for the diversification it offers across different renewable technologies.

My main concern is its limited 77 holdings and a sizeable US bias. I’ll want to balance that out soon.

After all, finding the right balance is what good Foolish investing is all about.

And for me, that means growth and income – all tax-free – in a Stocks & Shares ISA.

I see a handful of 10% fallers Friday. I’ve picked three I think are unfairly depressed, and I’ve added them to my potential buy list.

Dividend champion

My fist pick is City of London Investment Group (LSE: CLIG), which is one of the best dividend payers out there. The investment manager handed over 27p per share last year for a yield of 6.7%, and that was just the ordinary dividend. There was a special dividend of 13.5p per share on top of that.

Analysts are forecasting an ordinary dividend of 29p this year. Now, the share price has plunged by 14% over the past week, meaning the 29p would produce a yield of 7.4%.

City of London does mainly specialise in emerging markets, and there might be fears that the coronavirus contagion could hurt those disproportionately. But I don’t see any clear predictions regarding likely demographics of the infection, and I think the price fall is overdone.

City of London its also moving to invest in developed markets and in real estate too, and I’m seeing a long-term income buy.

Property

Next up is property developer U and I Group (LSE: UAI), and I’m upbeat about its prospects as it keeps winning impressive new contracts.

Even before the coronavirus panic escalated, U and I was being hit by the property blues. The double whammy has pushed the shares down 13% on the day at the time of writing, and they’ve fallen 18% over the course of the week.

Perhaps there are worries that work at development projects might have to be halted due to quarantine fears. If that happens, U and I could suffer some impairments in the current year. But again, I really don’t expect to see any long-term hit to this kind of business.

I don’t think there’s much chance of a dividend cut, as the firm is in a phase of returning surplus capital. And the share price drop has pushed the forecast dividend yields up to 6.5% this year and 7.2% next.

Investment trust

My final pick is the Schroder UK Mid Cap Fund (LSE: SCP) investment trust. As its name suggests, it invests in mid cap stocks, together with small caps, and aims for a total return in excess of the FTSE All Share index.

I guess investors fear smaller companies are more likely to be damaged by any coronavirus fallout, and that’s presumably why they’re dumping this trust.

Since the market closed at the end of last week, we’re looking at a 19% price fall, so what’s that done to the valuation? Investment trust shares are typically priced in relation to the value of their underlying assets, and typically trade at a small discount to that (though they some sometimes reach a premium).

The trust’s current net asset value per share (NAV) stands at 660p, and that puts the shares on a 20% discount. The NAV might fall, but I think the sell-off is overdone.

So, I’ve given up on HSBC and would rather invest in institutional asset manager City of London Investment (LSE: CLIG), which has a large proportion of operations focused on emerging markets. Like HSBC, the company also has an anticipated dividend yield above 6%.

Product diversification

Today’s full-year report reveals to us that Funds under Management (FuM) rose almost 6% compared to the equivalent period last year, to $45.4bn. Meanwhile, revenue from the management charges for running those funds slipped back nearly 6% and earnings per share fell by almost 12%.

CLIG has been working on diversifying its product offering for a few years by opening funds in developed markets and real estate. The directors put the erosion in profits down to a combination of volatility in the markets and changes in the “blended margin” due to the diversification process. Some 22% of FuM came from diversified products in the period, making the category a significant contributor to the overall financial results.

The directors declared a final dividend of 18p making the total dividend for the year 40.5p. However, that figure includes a special dividend of 13.5p paid in March. The ordinary dividend was, therefore, 27p, which is at the same level as the year before. Looking forward, City analysts following the firm expect the dividend for the current trading year to June 2020 to also be 27p.

Indeed, the ordinary dividend is flat, representing some tough trading conditions in the company’s markets, but I’m encouraged by CLIG’s willingness to return funds to shareholders with special dividends when it can afford them. There’s no indication of a special dividend in the current year, however.

Yet today’s share price close to 407p put the ordinary dividend yield at a little over 6.6%, which I see as attractive as long as CLIG can maintain the level of its dividend in the years ahead.

A steady outlook

In today’s report, Chairman Barry Aling described the year just ended as a “game of two halves.” He said that in the fourth quarter of 2018, trade frictions between the US and China affected equity markets with the S&P 500 “plummeting” by 20% and the MSCI Emerging Market Index (MXEF) falling 10%. But the markets recovered in the first months of 2019.

The directors expect more volatility in the years ahead, but they believe that CLIG will navigate through that because of its “prudent and long-term approach.” There appears to be a strong commitment to ongoing dividend payments, which is backed up, in my opinion, by the firm’s debt-free status. I like the look of CLIG and see the dividend yield as attractive.

Fellow Motley writer Roland Head has suggested the fallout from Brexit could provide Begbies Traynor with rich pickings as a company that can expect to do well when others suffer. And that could well be true, as a trading update Tuesday sent the shares soaring 15%.

Beating expectations

After a strong final quarter, the company told us “we now expect our revenue and profit for the financial year as a whole to be comfortably ahead of market expectations,” adding that “cash collection in the period was significantly ahead of our expectations, which has resulted in a year end net debt position of £6m.”

Debt is down from £6.3m at the halfway stage which, in turn, had fallen from £6.9m a year previously. That’s pleasingly heading in the right direction and is around the same level as the firm’s annual adjusted pre-tax profits. It’s not something I’d worry about, but I’d be cautious of any future uptick.

Outlook

Executive chairman Ric Traynor said: “We enter the new financial year with a strong order book and favourable market conditions, and are well placed to continue our track record of earnings growth.”

With annual dividends starting to climb ahead of inflation, and this year’s expected yield of 4.2% forecast to rise to 4.6% by 2021, I’m seeing a good long-term income stream here, coupled with a decent prospect for share price growth.

Big dividend

If you want to see a smaller company that’s throwing off cash, look no further than City of London Investment Group (LSE: CLIG). At the first-half stage, the emerging markets specialist announced a special dividend of 13.5p per share, on top of a 9p interim ordinary dividend, after recording a pre-tax profit of £5.2m. At the time, funds under management amounted to $5.1bn.

Cash stream

While it’s perhaps not always wise to rely on special dividends too strongly, the firm has been returning surplus cash to shareholders by such means for some years now. For the full year, City of London Investment is forecast to deliver a yield of 8%, with a smaller but still very attractive 6.8% on the cards for next year.

The firm has also been buying back its own shares, so it clearly seems to think they’re undervalued now. Looking at a forward P/E of 11.7, dropping to 10.8 for 2020, I think so too.

Risky segment?

With emerging markets likely to remain a volatile investing target, I do expect to see City of London Investment shares offering perhaps a rockier ride than some. But though they’ve shown bigger ups and downs than the FTSE 100 over the past five years, they’re happily 55% up over that period and way ahead of the index’s 6.6%.

I’ve always had half an eye on emerging markets, having lived in the East during the Asian Tigers period, and I think we could now be heading for a healthy decade. I’m tempted to invest a little of my pension pot in City of London Investment, but it would be cash I wouldn’t need for at least 10 years.

The shares are perky, up around 3.5% as I write, and why not? There’s a lot to like about the company, with the main attraction being the dividend yield, which runs close to 7%. However, I admit that dividends crossing the 7% threshold make me wary because high percentages can be a sign of operational problems ahead and the potential for a cut in the payout. In the case of CLIG, I think the payment looks sustainable because it’s backed by an enterprise that scores well against quality indicators, such as the return-on-capital figure running near 58% and the operating margin close to 37%.

Robust cash generation

On top of that, the company has a good record of delivering annual rises in operating cash flow, which provides decent support to both earnings and the dividend. Meanwhile, today’s share price around 397p puts the forward-looking price-to-earnings (P/E) rating at just under 12, which isn’t too demanding. But it gets better. Although the market capitalisation is £102m or so, the enterprise value is just 82m, suggesting a decent chunk of net cash on the balance sheet. If you discount that cash, the P/E rating falls further, and I think the firm looks like decent value.

However, today’s report reveals that the funds-under-management figure has been slipping, down almost 8% to £3.6bn compared to both the equivalent period last year and six months ago. The firm’s profit before tax is also down, coming in more than 21% lower than the year before. Chairman Barry Aling put the outcome down to weakness in the emerging and frontier market sectors, “together with a degree of ongoing asset re-balancing by some clients.” But he thinks the reduced figures mask gains the company made in the period attracting new funds to its developed and opportunistic value products, “which now represent 15% of the total asset base.”

Choppy emerging markets

I think investors can be a fickle lot, so it doesn’t surprise me that some have been running for the hills when the economic waters get a bit choppy. Mr Aling explained in the report that both emerging and frontier markets suffered falls of 15% and 16% during the company’s trading year. But I’m encouraged by the directors’ decision about the dividend, which suggests a reasonably optimistic outlook. They held the ordinary dividend at last year’s level and declared a special dividend “equivalent to one-half of the current annual distributions.” The ordinary and special dividends together make up that impressive 7% yield.

Mr Aling said the dividend decision demonstrates the directors’ confidence in the company’s recent “marginal recovery in financial performance” and also reflects the prudential capital structure of the balance sheet. The firm ended 2018 with almost £19m of cash in the bank. I like the look of CLIG and would be happy to add some of the shares to my portfolio today.