The FTSE 100 index of Britain’s biggest listed companies has slumped almost 30 per cent since the start of the year. The FTSE 250 index has been equally hammered and smaller AIM stocks are suffering badly, too.
Coronavirus has panicked markets and the future seems more uncertain than ever, even as the Government, central banks and policymakers worldwide try to calm nerves.
Against this backdrop, many investors may feel that selecting stocks for an Isa is a low priority. And yet, the facts and figures are compelling, especially over the long-term.
Stocks and shares Isas allow investors to avoid capital gains tax if their investments increase in value. Perhaps even more importantly, investors do not have to pay tax on their dividend income either.
Stocks and shares Isas allow investors to avoid capital gains tax if their investments increase in value
In today’s environment, with interest rates at all-time lows, such income is more attractive than ever, with one important proviso – investors need to be confident that companies can afford to pay it.
Some businesses may seem to offer generous dividends but a close look at their balance sheets reveals they can ill afford to make those payments. Sooner or later, such firms are forced to take action – Royal Mail, Centrica and Marks & Spencer are three high-profile examples in recent times.
The safest Isa stocks therefore are those which combine a track record of rising dividends with a solid balance sheet.
These are firms that can ride out shocks, such as Covid-19, and still reward investors with six-monthly payments that increase over time. The shares themselves may rise and fall in line with market volatility but the income is relatively secure.
BUNZL
Bunzl is a classic example. The company distributes thousands of everyday items to businesses around the world. It sells paper cups and napkins to caterers and cafes, bags and cartons to supermarkets, and workwear and safety helmets to builders.
The group is heavily involved in the cleaning, hygiene and healthcare industries, too, with alcoholic rubs, paper towels, mops, surgical gloves and face masks.
With so many strings to its bow, the business is relatively cushioned against economic cycles. Now, for instance, even as eateries experience falling footfall, Bunzl is almost certainly benefiting from the surge in demand for handwash and face protection kit. The group is also working with suppliers to make products greener and more sustainable.
Bunzl has grown steadily over the years, through a combination of organic expansion and smart acquisitions. The firm has been disciplined in its expenditure, so its balance sheet is strong. The combination has allowed Bunzl to increase dividends every year for the past 27, with payments per share rising from 4p in 1992 to 51.3p last year.
Bunzl shares have sunk by nearly a third over the past year, amid concerns about margin pressure and a decline in acquisition expenditure. The fall has been overdone, particularly as chief executive Frank van Zanten highlighted a promising pipeline of deals when he delivered 2019 results last month. At £16.83, these shares should generate solid returns in an Isa portfolio.
PRIMARY HEALTH PROPERTIES
This firm also benefits from an impressive dividend track record – 24 years of unbroken growth, going back to when the business was founded by managing director Harry Hyman in 1996. As its name suggests, Primary Health owns and invests in healthcare properties, primarily souped-up surgeries, where patients go for routine GP appointments but may also be able to see dentists, opticians and physiotherapists, have blood tests and even go through minor operations.
Things have been tough for savers but Isas can help offset hidden costs of investing
The group runs 490 such centres in the UK and Ireland and, because tenants principally work for the National Health Service, most of the rent is paid directly or indirectly by the Government. Growth prospects are sound, too, as the NHS tries to beef up doctors’ surgeries so fewer people go to hospital.
Primary Health’s portfolio is based around modern, clean and attractive centres that offer many advantages compared with the traditional surgery at the back of the GP’s house.
PHP’s shares have done well recently, not least because Hyman merged with his biggest rival MedicX this time last year. However, the stock, at £1.42, is likely to deliver steady long-term growth and the dividend income is attractive, too, with brokers expecting a payout of 5.9p per share for the current year, up from 5.6p in 2019 and putting the stock on a yield of 4.15 per cent.
REDROW
Redrow was founded in 1974 when 21-year-old Steve Morgan set up a civil engineering business in North Wales with a £5,000 loan from his father. The company soon morphed into a housebuilder, established a national presence and floated on the stock market in 1994.
Morgan left the business in 2000 but returned after the financial crisis in 2009, determined to restore Redrow’s status as a premium brand builder of high-quality homes. Formerly the owner of Wolverhampton Wanderers Football Club, Morgan finally retired from Redrow in 2019 by which time, the group had won multiple awards, increased sales and delivered years of above-average profits growth.
Brokers expect more of the same over the next few years, alongside solid dividends. A payout of 32p per share is pencilled in for the year to this June, rising steadily thereafter, possibly supplemented with special payments.
Yet the company trades at a discount to many of its peers. This does not reflect the quality of Redrow’s earnings or its ability to grow in a market which desperately needs more homes. Rather, the stock has suffered because Morgan and his family own a large chunk of shares, which leaves fewer for others.
Morgan has reduced his holding in recent years however and, at £5.26, Redrow is an attractive addition to your Isa portfolio.
JAMES HALSTEAD
Family businesses can be reassuring in unpredictable times and this is a classic of its kind. Founded more than 100 years ago, the business is still run by a scion of the Halstead clan, as it has been through the generations.
Halstead makes vinyl flooring and sells worldwide. Vinyl is widely associated with utilitarian stock and Halstead produces plenty of that, for use in institutions such as schools and hospitals. However, the group is known for innovation and its flooring is also used in smart hotels and department stores, as well as the Al Thumama stadium in Qatar. Sales and profits have increased at a steady pace over the years, allowing Halstead to deliver 45 years of rising dividends with further increases expected in 2020 and beyond.
Halstead shares are £4.80 and brokers expect a payout of 14.5p this year, putting the stock on a yield of just over 3 per cent.
While higher yields can be garnered elsewhere, the near five-decade track record of growth is hard to match. A strong Isa contender.
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.