As a shareholder you've got to be fairly optimistic about your company's prospects; expecting that its shares will produce a better return than its bonds. In contrast, bondholders can be pessimists; as long as the company or government generates enough money to pay the interest they'll still be paid even if the shareholders are having a tough time.
They say shares are for optimists, bonds are for pessimists. I am still fairly optimistic on equities which is why I continue to maintain a 60:40 balance but there’s no harm in hedging your bets and bumping up immediate income with fixed interest, high yielding trusts.
Similar to my other holding in this sector New City Trust, City Merchants investment objective is to seek to obtain both high income and capital growth from investment, predominantly in fixed-interest securities.
It is almost a year since I purchased this IT for my ISA as a replacement for a few sales from my shares portfolio including Charles Stanley and Diageo.
The overall portfolio is fairly defensive with a significant proportion of higher quality companies which the management consider to be ‘default-remote’.
They have this week announced final results for the 12 months to 31st December 2015 (link via Investegate).
Net assets have declined by -2.8% however taking the full year dividend of 10p per share into account, the total return was +2.7%.
The dividend target for the trust is 10p per share paid quarterly. This amount was paid in 2014 and 2015 and remains the target for the coming 12 months. At the current price of 178p the shares offer a yield of 5.6% which is obviously attractive compared to the rates on offer from our banks and building societies.
|CMHY -v- FTSE All Share Index (click to enlarge)|
Of course, the share price will move around as can be seen from the chart and this may provide opportunities for a better yield at certain points.
For me, the trust provides some diversity to equities and a steady quarterly income stream.
As they say, slow & steady steps….