The exciting news for investors is that from April 2017, the annual ISA allowance is going to rise from the current £15,240 to £20,000. What that means is we’ll be able to invest up to £20,000 per year in shares without paying any tax on share price rises or any further tax on dividends. But before then, what should we put into our 2016-17 ISA?
I reckon there’s a very good case for a solid safe investment like Diageo (LSE: DGE). Although the share price seems to go through flat phases, over the past five years it’s up 66% to 1,905p, with the FTSE 100 having managed just 7.4%. And over 10Â years, Diageo shares have more than doubled while the FTSE, thanks to the financial crisis dragging down the banks, has gained a paltry 2.3%!
But there’s more than that to Diageo as the drinks maker has been paying solid dividends too. They’ve been coming in close to the long-term FTSE average of around 3%, so they’re not the highest available, but they’ve been well covered by earnings, and they’ve been rising ahead of inflation. Diageo also has a dividend reinvestment plan, which is ideal for long-term ISA investors.
And with the company’s unbeatable brand portfolio (think Johnnie Walker, think Smirnoff, think Guinness…), I really can see Diageo rewarding shareholders for decades to come.
A recovering miner?
A miner like Rio Tinto (LSE: RIO) might be a bit risky, at least in the short term with the sector under the cosh. But the price of iron ore, Rio’s biggest product, has started to pick up again recently and Rio Tinto shares have gone along with it. Over five years, the Rio price has lost more than 50%, but since a low on 20 January it’s picked up 22%, to 1,930p.
With Chinese demand and therefore the future of commodity prices still very uncertain, Rio Tinto shares are probably still in for a volatile year or even more. But short-term ups and downs are for City day traders to worry about, and shouldn’t trouble the heads of long-term ISA investors.
And over the next decade or two, China will settle, demand will continue strongly, and I really can see Rio Tinto shares heading on a decent bull run. Oh, and you should get some decent dividends too, with 4% predicted for 2017 when earnings are expected to start their recovery.
More from housing?
You might think I’ve missed the gun by suggesting Barratt Developments (LSE: BDEV) now that shares in the housebuilder have more than five-bagged over the past five years, to 572p. And for sure, if you’d stashed some away in your ISA back in 2011, you’d be sitting pretty today.
But the thing is, even after that amazing climb, the shares still look good value to me now. We’re looking at a forecast rise in earnings per share (EPS) of 19% for the current year, followed by another 10% in 2017. That gives us a P/E of 10.2 this year, dropping to 9.3 next, and that’s way below the FTSE’s long-term average of around 14.
On top of that, Barratt is shovelling cash in the direction of its shareholders, having paid a total of 25.1p per share in 2015, including the ordinary dividend plus a special payment. There’s more of the same on the cards, with 29.7p and 36.6p pencilled-in for this year and next, providing total yields of 5.5% and 6.7%, respectively.