My opinion on Individual Savings Accounts (ISAs) is firm — a Stocks & Shares ISA is a very good thing, but a cash ISA is pants.
The big problem with a cash ISA is that current interest rates are coming in below inflation, which guarantees that you’re going to lose money in real terms — and what kind of investment is that?
With a Stocks & Shares ISA, however, you can pursue high dividends which will easily beat inflation — the FTSE 100 as a whole is forecast to provide a yield of around 4.5% this year, and many individual dividends are a lot higher. You do need to have a long-term focus, though, and I see that as especially important if you’re investing in a Lifetime ISA.
The additional benefit of a Lifetime ISA is that the government will add up to an extra £1,000 per year for those who qualify, but the downside is that there are penalties for early withdrawal — and the penalties are higher than the top-up.
Buy and forget
I like long-term buy-and-forget stocks, and on that score I see SSE (LSE: SSE) as an attractive option. The shares have been out of favour due to fears of energy price caps and increasing competition, and the price has fallen by 18% over the past 12 months — and it’s even down 14% over five years.
But that ignores the real attraction of SSE — its big dividends. If you’d bought five years ago, you’d have raked in a return of around 35% from dividends, to give you an overall return of about 20%. During a very tough period for energy providers, I see that as a pretty good performance.
Now that the SSE share price has fallen, forecast dividends look set to yield 7% and more, and I see that as one of the FTSE 100’s most attractive yields right now. It’s not quite up there with the big yields on offer from our top house-builders, but utilities companies are likely to be less volatile and should be great for income over the very long term.
The key thing that I think makes SSE especially suitable for a Lifetime ISA is its forward visibility. It’s one thing bagging a top dividend yield today, but the sustainability of that yield, and whether it will grow over time to keep pace with inflation, are two important considerations.
Dividend outlook
On that score, SSE has already lifted its interim dividend by 3.2%, and that’s comfortably ahead of UK inflation (which came in at 2.2% in October). The company also reaffirmed its intention to pay out 97.5p per share for the full year, which would provide a yield of 8.7% on the share price, as I write.
SSE’s five-year dividend plan, announced with its last full-year results in May, would actually see the dividend falling to 80p for the 2019-20 year, to reflect “the impact of the changes in the SSE group expected to take effect by then.” But 80p per share would still yield a tasty 7.2%.
And then for the next three years, the firm is targeting dividend growth that would “at least keep pace with RPI inflation.”
With that kind of clarify of expectations, I don’t see many stocks that are more suitable for a Lifetime ISA than SSE.