What sort of companies can make good contributions to your wealth over a decades-long period? If you can find them, they’re the ideal ones to stash away in your ISA every year and just forget about while that tax-protection helps them compound to a handsome sum.
And with a new allowance of £11,760 coming our way in April, which companies should be be choosing this time?
I reckon allocating some of that ISA protection to Aviva (LSE: AV) (NYSE: AV.US) should reward you well, and I’ll tell you why.
Good businesses
Some industries come and go, and some change beyond recognition over time. But insurance and savings really is not substantially different from its early days. It might not offer the same “get rich quick” opportunities that new technology can provide, but the insurance business gives you something more important over the long term — safety and stability.
There will still be down periods for even the safest businesses, and Aviva and the insurance sector has been badly hit by the banking crisis.
A bad decade
In fact, in the five years from March 2004 to March 2009, Aviva shares crashed by 70% — although the deep dip at the worst of the crunch was actually pretty short-lived. And in the five years since, the shares have trebled to 524p — giving us a net movement of almost precisely zero over a decade.
But had you been investing a portion of your ISA cash every year in Aviva, you’d still have made money as you’d have received decent dividends each year, and you’d have been able to buy more shares during the crisis with the same amount of money — it’s a thing called “pound cost averaging”.
If that’s the worst…
And even if you’d only received dividends with no capital growth over the worst decade for the industry in living memory, you’d still have beaten a savings account in these low-interest times.
Aviva was forced to cut its dividend in 2012 after several years of earnings falls left it too stretched, but even after that the shares are still offering dividend yields of around 3.2% on today’s share price — for 2014, the dividend should be covered around three times by earnings, which is very solid for the sector.
Dividends picking up again
And the new rebased dividend level should be the start of a new income-growth period, with the final dividend of 9.4p per share for the second half of 2013 actually 4.4% up on the final installment a year previously.