Seven top shares to consider for your ISA
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Companies with high dividend yields tend to be mature, well-established companies with reliable cashflows. Henk Potts, equity strategist at Barclays Wealth, says: "The corporate picture is very bright at present."
He expects the cost cutting measures that many businesses have undertaken over the past two years will lead to a strong bounce-back in corporate profitability.
For Potts, a key buy for income investors would be Vodafone, which has been yielding nearly 6%. He expects the company to deliver strong performance in 2011, with continued improvement in its core markets and higher growth from emerging markets, which will result in "decent earnings growth".
He points out that there is also the likelihood of a dividend coming out of its subsidiary Verizon Wireless at last, which would boost its current cashflow forecast.
Two other income-yielding shares favoured by Potts are National Grid and Shell, although he says that Shell is more risky than his other two recommendations. One reason he likes the oil giant is due to its accelerating disposal programme.
Vodafone and National Grid are also among the recommendations put forward by Thomas Malloch, investment manager at stockbroker Redmayne Bentley. He says: "We certainly believe equities are an attractive source of income for investors and we expect to see dividends from FTSE 100 companies increasing in 2011."
He says National Grid has had a strong year and as a utility responsible for the transmission of electricity and gas in the UK and parts of the US, it is a good defensive choice for investors.
In the insurance sector, Malloch likes Aviva and RSA Insurance, which both have yields of more than 6%. He believes Aviva's cost cutting and restructuring, as well as good cashflow, are favourable indicators for increasing dividend growth next year.
Several of these share choices are also echoed by Graham Spooner, investment adviser at The Share Centre. He also highlights GlaxoSmithKline for those who want a more low-risk choice.
He explains: "The company has a lot more to it than meets the eye. It has a newish management that has been doing well in revitalising it and expanding its operations in the emerging markets.
"It has a good pipeline of new drugs and other products coming onto the market, as well as old favourites, such as Lucozade, Panadol, and NiQuitin for those trying to give up smoking.
"It is steady and dull but these attributes are likely to appeal to many income seekers."
Spooner says another attractive but somewhat higher-risk choice for income seekers is Chesnara, a life insurance underwriter based in Lancashire. "Formerly known as Countrywide Assurance," he says, "the company changed its name after acquiring a Scandinavian company.
"It underwrites life, disability and health insurance, but the main interest for investors is that it has a yield of more than 6% and plenty of spare cash."
This article was written for Money Observer, Moneywise's sister publication in February 2011
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).