My main investing goal for my Stocks and Shares ISA is to build up a portfolio of dividend stocks that will provide me with a reliable and rising income when I retire.
By reinvesting my dividends I hope to boost my returns at very low risk — a 5% dividend reinvested for 14 years will double your money. And by holding stocks for long periods, I can cut trading costs and hopefully enjoy decent capital gains.
This simple recipe for investing has worked well for me so far and has been more successful than riskier strategies I’ve tried. So what stocks would I suggest?
Pick proven winners
I’m looking for proven winners with a long track record of profitable growth. My first pick is consumer healthcare group Reckitt Benckiser Group (LSE: RB). This £45bn group has a portfolio of health and hygiene products including Dettol, Durex, Vanish and Strepsils.
In my view, the group’s tilt towards healthcare makes sense as many customers will be reluctant to buy cheap or unknown alternatives to such products.
Shares in this defensive giant are rarely cheap. But growth has slowed since 2017 and the shares look quite affordable to me. For a company with an operating margin of 24%, the forward price/earnings ratio of 18 and 2.7% yield look fair to me.
A new chief executive is expected to come on board next year. Now could be a good time to buy, ahead of any new growth plans.
Invest in luxury
My next company is also a consumer business, but operates at the upper end of the luxury market. Fashion firm Burberry Group (LSE: BRBY) has been in business since 1856. It’s grown into a global business with annual sales of £2.7bn and a wealthy customer base.
Investing in luxury can be a good defensive strategy, because rich customers are often less affected by recessions than regular shoppers. In recent years, growth has been strong in China thanks to a growing middle class.
Chief executive Marco Gobbetti is hoping take the brand further upmarket in partnership with new designer Riccardo Tisci. Although sales are expected to be flat this year, a modest return to growth is expected in 2020.
In the meantime, the balance sheet looks bulletproof, with net cash of more than £600m and profit margins close to 20%. Although the dividend yield is modest, at 2.2%, I expect reliable long-term growth.
Packaging profits
Packaging comes in for a lot of criticism for the waste it creates. But big companies are increasingly demanding packaging that’s more sustainable and efficient than in the past.
Economies of scale mean that producing such packaging is a business that’s best-suited to large companies. One of my top picks in this sector is FTSE 100 group Mondi (LSE: MNDI), which produces a huge range of paper, card and films for industrial and consumer firms.
Mondi’s share price has doubled since the end of 2013, thanks to strong profit growth. The group’s dividend has risen by an average of 16% per year over that period, supported by strong cash generation.
A return on capital employed of 18% suggests to me that money spent on expansion is delivering good value. With the shares trading on 11 times forecast earnings and offering a 3.8% yield, this is a stock I’d be happy to buy and hold.