Good quality, dependable dividend income stocks are arguably the single most important component of any sound portfolio. Properly conceived they provide investors with both a high level of income whilst simultaneously reducing the volatility of their portfolios – something that many investors yearn for in these turbulent and uncertain times. Whilst we always look for the next big stock for capital gains, we also like to have positions in solid income producing stocks for the reasons outlined above.
One of the best and lowest risk ways of achieving this is by investing in investment trusts. Not only can they provide the high level of income we seek but they have the added advantage that many of them can be bought at a significant discount to their net asset values (“NAV”). In other words, you can effectively buy £1 worth of good quality, listed securities for a fraction of that price. Furthermore, because they derive their income from well diversified portfolios of investments, their income streams are relatively safe and dependable. In addition, they have no choice but to distribute that income to their shareholders. This is because investment trusts are prevented by law from retaining more than 15% of their gross income. This effectively obliges them to pay out the bulk of their annual profits to their shareholders. Another attraction of investment trusts, is their transparency. They are very transparent and publish monthly fact sheets which show their full list of investments and other useful information. This not only allows investors to see exactly what they are buying into but it also makes it easy for them to monitor their investment thereafter. This combination of a high and stable income stream, low volatility, transparency and the ability to effectively buy stock in good quality listed companies at a significant discount to market value is difficult to beat.
One investment trust that has caught our eye and which we think is particularly attractive is the Blue Planet Investment Trust Plc (ticker: BLP.L; website: www.blueplanet.eu). It is listed on the London Stock Exchange and is relatively small but therein lies the opportunity. This has led to it falling under the radar screens of most stockbrokers and fund managers who increasingly only look at very large investment trusts yet it is one of the most attractive investment trusts in the UK. It currently has a whopping 8.7% dividend yield and can be bought at a 25% discount to NAV.
It also has a well-diversified portfolio of good quality, listed investments comprising ordinary and preference shares and bonds. These are individually itemised on its monthly portfolio holdings which can be found on its website www.blueplanet.eu Furthermore, investors can take comfort from the fact that the directors of the Trust collectively own nearly 28.5% of its equity. So their interests are aligned with those of the Trust’s shareholders and they have every incentive to make sure that the Trust performs well.
In their most recent financial results, the Director’s noted the following, “Although stock markets have been weak over the past six months, our income from investments has continued to grow strongly. In the six months to 31st October 2015 income rose by 40.5% to £1,389,304 (October 2014 – £988,978). Your Board is committed to paying as high a dividend as is prudent and, subject to no unforeseen eventualities, we expect the dividend for the year to 30th April 2016 to match or improve on the 2.82p per share we paid last year.”
So shareholders know what to expect in terms of the dividend for the year to 30th April 2016 and the yield they will get based on the current share price. It will be at least 8.7%. When looking at investment trusts, another key consideration is Net Asset Value or NAV. This is effectively the liquidation value of the company. If the trust sold all its investments and distributed the cash to shareholders, this is the amount they would receive. BLP release weekly and monthly NAV calculations to keep investors up-to-date on the value of the portfolio they are invested in. The most recent NAV announcement was 43.1p per share as at 15th January 2015. This compares to today’s mid-price of 32.5p, meaning the stock is trading at around a 25% discount to net asset value. In other words, you can effectively buy £1 worth of good quality, listed investments for 75p. That equates to an immediate 33% uplift in value on the purchase price.
We think that this combination of a dividend yield of at least 8.7%, a 25% discount to NAV backed up by a high quality, diversified and transparent international portfolio of investments represents exceptional value and fits our criteria for a core income stock for any well managed portfolio. However, these favourable terms are unlikely to persist and it is only a matter of time before other investors become aware of the stock’s attractions and the price is bid up, so investors would be well advised to act now while the opportunity exists. Indeed, they already are becoming aware of its attractions. Astute West Country investors Philip J. Milton & Co. have been quietly picking up stock and now have a 13% holding in the Trust and the directors continue to add to their holdings. The shares are a STRONG BUY.
- Share Price (mid): 32.50p
- Market Cap: £16.1m
- Net Assets: £21.3m
- Discount to NAV: 25%
- Dividend per share: 2.82p
- Dividend Yield: 8.7%
- Shares in issue: 49.47m