The big benefit of holding shares in an ISA is that all future capital gains and income are tax free. For a higher rate taxpayer, this means that a 5% yield inside an ISA is equivalent to a 6.7% yield in a taxable account.
Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US), HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) and Rio Tinto (LSE: RIO) all currently offer yields of 5.5% or more, making them ideal ISA top-up choices as April 5 approaches.
Shell
The falling price of oil has caused Shell’s share price to fall nearly 18% over the last six months, driving up the firm’s prospective yield to a chunky 6.5%.
Analysts’ earnings forecasts have been cut, but the shares remain attractively valued, trading on a 2015 forecast P/E of 11.5, based on the latest consensus forecasts.
It’s worth remembering that Shell is quite well positioned to deal with lower oil prices, thanks to low debt levels, a strong credit rating and the ability to cut or delay significant amounts of expenditure.
I suspect Shell’s share price is close to bottoming out, so now could be a good time to buy.
HSBC Holdings
HSBC is another of the FTSE 100’s battered giants: shares in the £108bn bank have fallen by 7% so far this year, pushing HSBC’s prospective yield up to a mouth-watering 6.4%.
The world’s local bank has caught some flak from MP’s recently, and chief executive Stuart Gulliver has been forced to scale back his profitability targets for the bank. However, HSBC currently trades on a price-to-book ratio of just 0.9, with a 2015 forecast P/E of 9.6.
In my view this is cheap enough to discount most of the risks facing the bank, which I rate as a strong income buy.
Rio Tinto
Rio Tinto isn’t immune to the effects of low iron ore prices, but the firm’s iron ore production cost is exceptionally low, at just $17 per tonne.
Given that iron ore is currently trading for around $58 per tonne, it’s easy to see how robust Rio’s profits are likely to be — and why the firm reported an operating margin of 25% in 2014.
Rio shares currently offer a 5.5% prospective yield and trade on a forecast P/E of just 11.2. Debt levels are low, and I rate the miner as a strong income buy.
You may not agree with my views on these three companies, but the benefits of investing inside a tax-free ISA are not in doubt.