Could £10,000 invested in this Dividend Aristocrat secure my passive income retirement goals?

When aiming for a reliable and steady stream of passive income, it’s best to take the slow road. Those fast-growing tech stocks may look appealing but if there’s one thing investing has taught me, it’s that easy money goes as quickly as it comes.

Once I’ve retired and I’m without an income, I can’t afford to gamble on the latest hot tech stock. I need to know that my investments are as secure as possible — and that the income they pay is reliable.

Needless to say, nothing is ever guaranteed. But some dividend-paying funds have proven so reliable, they’ve earned the title of Dividend Aristocrat. That is, they’ve paid increasing dividends over a long period — often several decades.

Usually, they’re incredibly boring investment trusts with forgettable names that never make headlines. But one among them is fairly well known, having paid a steadily increasing dividend for 57 years!

City of London Investment Trust

I can’t imagine there are many funds more reliable than the City of London Investment Trust (LSE: CTY). Managed by Janus Henderson Investors, it focuses on cash-generative businesses that can sustainably grow their dividends. Some of its top holdings include BAE, Shell, and RELX.

Currently, the fund is trading 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’s traded at a premium to NAV.

One downside to investing in trusts is reliance on the performance of the fund’s managers. Investors don’t have a say in investment decisions, nor any changes to management. And since it’s primarily invested in UK equities, a downturn in the UK economy could hurt the share price.

More experienced investors may be able to achieve higher returns by actively trading the underlying assets. As such, funds may not appeal to all investors as they are more of a ‘set-and-forget’ strategy.

What kind of returns can I expect?

I don’t have data on the CTY stock price going way back to when the fund started in 1932. However, it’s increased by 200% in the past 30 years, providing annualised returns of 3.73%.

Dividends have grown at a similar rate, increasing from 7.18p in the year 2000 to 20.6p per share today. In that time, the yield has fluctuated between 3.5% and 7%, and is currently standing at 4.8%.

Crunching the numbers

Assuming an average yield of 5% and 3.5% price growth, an investment of £10,000 could grow to around £118,600 in 30 years (with dividends reinvested). That would only pay a dividend of £5,560 a year. 

Clearly, not sufficient for a luxurious retirement.

However, I expect to continue working for another 30 years, so I can contribute more. Even a minimal contribution of £100 a month could balloon the fund to £270,300 in 30 years, paying an annual dividend of £12,620. With a monthly contribution of £200, the dividend payments would be almost £20,000 per year. 

That would be a very comfortable income on top of my pension.

Of course, that’s not guaranteed and returns could be far less. What’s more, other stocks promise a higher return in a shorter period. But are they backed by a fund with a 57-year-long track record of increasing dividends?

When thinking in terms of retirement, reliability is as important as returns.