Energy firms are facing the squeeze — with an election not far off and attention focused on energy costs, the scope for raising prices is more restricted than it has been for a few years.
The future looks good
But over the long term, gas and electricity are essentials and people will be paying for them for many decades to come. And that’s how ISAs are best targeted — at companies that can hopefully be bought and forgotten about for 20 years or more.
And that brings me to Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US), the company trading under the British Gas and Scottish Gas brands in the UK — confusingly, BG Group owns the British Gas brand overseas.
Like the rest of the sector, Centrica faces some of the strictest regulation of any UK industry, but that does have an upside for investors. With prices set in advance, gas and oil contracts negotiated over the longer term, and with customer numbers and demand really pretty constant, year-on-year income is amongst the easiest to predict.
Strong dividends
And with capital reinvestment costs also planned long-term, it’s safe for Centrica to pay out a larger share of its earnings in dividends than just about any other type of business. Centrica is paying pretty reliable annual yields of around 5%, and that is especially attractive for income seekers in times of low interest rates.
The share price has actually been doing pretty well too — it generally sticks close to the FTSE 100 average, but with dividends that easily beat the FTSE’s average yield of around 3%.
Over the past couple of months the political fallout has admittedly sent the shares down, and at 334p they’ve lost about 8% over the past 12 months. But over the past 10 years? Pretty much bang on the FTSE, with similar volatility — for an overall gain of 50%, which is an annual rise of around 7%!
Healthy growth
What about the future? Let’s assume a very conservative average share price gain of just 3% per year, and a regular 5% dividend yield with dividends reinvested. Every £1,000 invested in Centrica today would be worth £4,700 in 20 years (though if the past decade’s rise of 7% per year is repeated, we’d double that to £9,600!)
And that is what long-term ISA investments should look like.