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If you're looking for a steady, reliable stream of passive income, it's best to take the slow route. Fast-growing tech stocks may look appealing, but if there's one thing investing has taught me, it's that easy money goes as fast as it comes.
Once I retire and have no income, I won't be able to afford to gamble on the latest stocks of the hottest tech companies. I need to know that my investments are as safe as possible and that the income they generate is reliable.
Needless to say, nothing is guaranteed, but some dividend-paying funds have proven so reliable that they have earned the title of “dividend aristocrats.” That is, they have paid increasing dividends over a long period, often several decades.
They are usually incredibly boring mutual funds with forgettable names that never make headlines. But one of them is quite well-known, having paid steadily increasing dividends for 57 years!
City of London Investment Fund
I can't imagine there being many more reliable funds than the City of London Investment Fund (LSE: CTY). Managed by Janus Henderson Investors, it focuses on cash-generating companies that can sustainably grow their dividends. Some of its top holdings include: BAE, Shelland CHILL OUT.
The fund currently trades at a 0.32% discount to its net asset value (NAV), making it cheaper than the combined value of its holdings. For most of the past decade, it has traded at a premium to its NAV.
One disadvantage of investing in trusts is that they are dependent on the performance of the fund's managers. Investors have no say in investment decisions or management changes. And since they invest primarily in UK stocks, a downturn in the UK economy could hurt the share price.
More experienced investors can achieve higher returns by actively trading the underlying assets. As such, funds may not appeal to all investors as it is more of a “set it and forget it” strategy.
What kind of return can I expect?
I have no data on CTY's share price going back to when the fund began in 1932. However, it has risen 200% over the past 30 years, providing annualized returns of 3.73%.
Dividends have grown at a similar rate, from 7.18p in 2000 to 20.6p per share today. In that time, the yield has fluctuated between 3.5% and 7%, and currently stands at 4.8%.
Analyzing the numbers
Assuming an average yield of 5% and price growth of 3.5%, a £10,000 investment could grow to around £118,600 in 30 years (with dividends reinvested). That would only pay a dividend of £5,560 a year.
Clearly, this is not enough for a luxurious retirement.
However, I expect to be working for another 30 years, so I can contribute more. Even a minimal contribution of £100 a month could see the fund grow to £270,300 in 30 years, paying an annual dividend of £12,620. With a monthly contribution of £200, dividend payments would amount to almost £20,000 a year.
That would represent a very comfortable income in addition to my pension.
Of course, that's not guaranteed and the returns could be much lower. Also, other stocks promise a higher return over a shorter period, but are they backed by a fund with a 57-year track record of growing dividends?
When thinking about retirement, reliability is just as important as profitability.
