Dividend of the week - Caledonia Investments

DividendMax Ltd.

Dividend of the week - Caledonia Investments

Sometimes it is easier to sit back and watch others manage your money, whilst you focus on perhaps a few favoured stocks that you get to know very well. This approach is expensive because whichever way you look at it, you are paying an overpaid fund manager to underperform the market is many cases. However, this is not always the case and sometimes you can gain exposure to sectors or situations that you do not understand. For that reason, it may be worth paying the price. Up until recently I refused to cover the Investment Trust Sector in DividendMax on the grounds that I believe you are better off managing your own money. After some pressure from our clients, we initiated coverage of those in the FTSE 350.

This sector is large and it makes me wonder just how much money has been lost by investors over the years as they lose a percentage of their gains in management fees, which unfortunately do not go away if they actually lose you money. Rant over. Lets get down to business.

Unfortunately, I found in doing my research of investment trusts that they are a law unto themselves in the information that they provide over the internet. Compared to their ‘real economy’ constituents of the FTSE 350, they have a lot to learn and a long way to go.

My initial search in DividendMax reveals we cover 32 Investment trusts in the FTSE 350, which immediately gives you an idea of the scale of the sector. Almost a tenth of the FTSE 350. As we are interested in dividends, we set a yield criteria of  3% which reduces the list to 20. It is not possible or sensible to look at dividend cover, so we next look at consecutive annual dividend increases and we are going to go for 5+ as it should be a good indicator of the track record of the investment management. This gets the number down to 9 and it is worthy of a list:

Merchants Trust, Perpetual income & Growth, Temple Bar, Murray International, Edinburgh Investment trust, Alliance trust, Foreign & Colonial Investment trust, Caledonia Investments and Bankers Investment trust.

Merchants trust has 30 years of consecutive dividend growth from 4.2p in 1982 to 23p in 2012 and has performed well in 3 of the past 4 years, but had a bad year when the markets fell in 2008/9. Perpetual is one of the funds that does not provide what I consider to be quality information to investors. Same with Edinburgh and Foreign & Colonial (the first ever investment trust) and Bankers Trust.  The performance of Temple Bar against benchmark is very good over all timescales and is reflected in a very small premium to NAV. Murray international is on a 6% premium to net assets, so would not consider that. Alliance trust is on a 10% discount to NAV and has a good dividend track record, but not a great performer. Caledonia Investments has increased its dividend every year for 45 years. It stands at a pretty hefty 21% discount to NAV. It has a good long term (10 year) track record although it has performed poorly on a 3 and 5 year view. It is performing in line this year.

Given that this is a dividend article, we are going to value longevity. For the big discount, the long term investment philosophy, the 45 year dividend track record, the excellent 10 year performance record and the generally informative nature of their website, our dividend of the week is Caledonia Investments.

A very specific trust that I like is the Blackrock World Mining Trust which goes ex-dividend on the 6th March.

Companies mentioned

This article was originally acceessible only to DividendMax members and is now publicly available.