I try to make the most of my ISA allowance every year. I focus on growth companies and income stocks to try and maximise the benefits of these wrappers. 

UK shares to buy

A couple of companies on the market stand out to me right now as being tremendous ISA investments. The first stock is Alfa Financial Software (LSE: ALFA).

As its name suggests, this enterprise designs and develops software for the asset finance industry. This is an incredibly defensive market because organisations buying the company’s software are unlikely to change their providers regularly. 

The group is currently chasing some significant new contracts, with 10 prospects in its late-stage pipeline. Even without these new prospects, the company expects to report revenue growth of 5% for the year. 

Despite the sticky nature of its product, Alfa’s growth shouldn’t be taken for granted. If the company underspends on research and development, or suffers a significant cyber attack, customers may move elsewhere. 

This risk aside, I’d buy Alfa for its growth potential as an ISA investing champion. 

Technological change 

Another company I’d acquire is RM (LSE: RM). This education software business recently reported a 21% increase in revenues for the six months ended 31 May. Statutory profit before tax increased 213% in the period. This allowed the group to reinstate its interim dividend at 1.7p. 

RM’s education business has benefited from the ongoing digitisation of school infrastructure. This has accelerated during the pandemic, and I think it will continue. Technology adoption has accelerated in many sectors over the past year. I believe it’s improbable the world will ever go back to the methods used before the pandemic. 

Based on this view, I think RM’s profits and sales will continue to grow, and the company may be able to increase its dividend further in the years ahead. Those are the reasons why I’d buy the stock for my ISA today. 

Key challenges the group will face are competition and higher costs. The software sector is incredibly competitive, and if the group doesn’t keep up with its competitors, it may lose market share. 

ISA investing for income 

The final company I’d buy for my basket of UK shares in a Stocks and Shares ISA is Ferrexpo (LSE: FXPO). This iron ore miner is an income champion. Unfortunately, it may not be suitable for many investors for environmental and governance reasons. Iron ore mining is an environmentally damaging process, and the enterprise is majority-owned by just a few shareholders. 

These risks aside, it’s been able to capitalise on rising iron ore prices over the past 12 months. According to the company’s 2020 financial results, earnings before interest, tax, depreciation and amortisation increased 46%.

Strong earnings allowed the group to eliminate its debt and announce a special dividend for 2020. Total dividends for the year amounted to 52p, giving a dividend yield of 11% on the current share price. 

This income potential is why I’d buy the stock for my ISA today. 

Focusing on UK growth stocks

Having said that, some investors do well by using multiple methods. But my strategy involves aiming to invest in growth companies. So I’m looking for businesses with the potential to increase their earnings and expand their operations year after year. And one stock I’ve been following for some time is education technology and resources company RM (LSE: RM).

But the firm is no FTSE 100 giant. With its market capitalisation around £174m, we can find RM in the FTSE Small Cap index. But I tend to find most of my growth share ideas among smaller enterprises. One general theory is that smaller businesses tend to have more room to grow.

And RM was doing well in the years leading up to the coronavirus crisis. It had been raising the shareholder dividend by increments and the payment was up around 112% over about six years. Although the pandemic caused the directors to stop dividend payments last year.

As well as dividend gains, shareholders enjoyed capital appreciation from a rising share price. And growth in earnings partly drove that outcome. But earnings and the share price have been volatile over the past 12 months.

RM has positive potential as well as plenty of risks in its business. We’ve seen how exterior events can affect trading. Although new pandemics don’t arrive every day, the company does have its operations concentrated in one sector that’s mostly publicly funded. So future changes in government policy could damage the quality of the firm’s trading opportunities, for example.

Business recovery expected

The closure of schools has been a blow for RM. And chairman John Poulter said in today’s full-year results report: “Trading in 2020 was inevitably dominated by the consequences of Covid-19.” In the 12 months to 30 November 2020, revenue dropped by 16% year-on-year. And adjusted earnings per share plunged by 51%.

But despite the ongoing challenges of Covid-19, the outlook is positive and the directors declared a dividend of 3p per share. I think the move to reinstate dividends speaks volumes about their confidence in the firm’s future.

The decision was probably helped by a strong performance regarding net debt, which came in at £1.3m, down from £15m the year before. RM achieved that outcome with a “focus on cash and costs.” But the pension deficit has risen to £18.7m, up from £6m a year ago.

City analysts expect earnings to snap back by just over 30% in the current trading year to November. Meanwhile, with the share price near 211p, the forward-looking earnings multiple is around 13. And the anticipated dividend yield is about 2.3%. Forecast earnings should cover the shareholder payment around 3.5 times. I think the valuation is undemanding compared to the company’s ongoing potential to grow.

However, over the past few years, I’ve increased my wealth by acquiring a diversified basket of growth shares. While past performance is no guarantee of future potential, I think I can continue to grow my wealth by following a similar strategy as we advance. 

With that in mind, here are three of the best growth shares I’d buy for my portfolio right now.

Stock investing: market opportunities 

Fevertree Drinks (LSE: FEVR) has been on my radar for a long time. The consumer goods company has cornered the market for premium tonics in the UK. This foothold has given the group solid foundations to drive expansion overseas.

Although this growth strategy struggled in 2020, analysts forecast a return to growth in 2021. Current projections suggest the business will report sales of nearly £300m in 2021, up from £247m in 2020. However, I should caution that these are just projections at this point.

Still, Fevertree is highly profitable. This gives the business plenty of cash to reinvest back into its growth efforts. Meanwhile, the group’s operating profit margin has averaged 29.8% for the past five years. Although this profitability doesn’t guarantee growth, I think it puts the company in a good position.

So, while the business does face risks, such as increased competition and higher costs, I’d buy Fevertree based on its growth potential and growing profitability. 

Growth shares

Property and stock investing are very different activities, but I think Rightmove (LSE: RMV) offers the best of both. It owns the largest online property portal in the UK and I think it’s going to be difficult for competitors to grab market share. Indeed, many have tried and failed to topple Rightmove from its lofty podium.

Of course, its historical market dominance doesn’t guarantee future success. A well-funded competitor could decimate its business, especially if a large technology firm backed it. That’s something I’ll keep an eye out for. But, in the meantime, I’d buy the stock based on its current market position and potential.

The housing market is worth an estimated £1bn per 100,000 property transactions. It’s a considerable value generator for the UK economy, and Rightmove is one of the most important businesses in this sector. I reckon that bodes well for the group’s future potential. 

Successful stock investing is all about forecasting future growth trends. I think only a handful of markets will grow no matter what happens to the global economy. One of those is education.

RM (LSE: RM) supplies education resources, such as examination technology and IT solutions to educational bodies in the UK and worldwide. I think the business model is incredibly attractive, although there are risks to RM’s growth.

The market is highly competitive and dependent on government funding, which can vanish overnight. These are two significant risks the company faces.

Still, if management can successfully execute a growth strategy over the next few years, I’d buy RM, considering its potential. With revenues of just £224m for 2019, the group is still relatively small compared to the UK education market’s overall size, which stands at £20bn. 

At the time, RM said closures of that scale, along with international shut-downs and travel restrictions, would “inevitably impact trading.” So the company cancelled the full-year shareholder dividend payment for 2019.

The shares and the business are bouncing back

What is perhaps more of a surprise is the remarkable come-back the shares have staged. After touching a low close to 110p near 24 March, the price bounced all the way back to around 270p on 16 June. That represents a return of about 145% for anyone lucky or prescient enough to have bought the shares at the bottom.

However, perhaps there were clues in the firm’s record of trading about the potential for a strong bounce. Prior to the crisis, revenue and earnings had been generally rising over a five-year period. And there had been strong annual advances in the dividend. Indeed, RM looked like it had command of a strong niche within a resilient sector.

But today’s interim results report reveals to us how badly the lock-downs affected RM’s trading figures. In the six months to 31 May, revenue declined by 17% year-on-year and adjusted diluted earnings per share plunged by almost 65%. Naturally, the directors have decided not to pay an interim dividend this year.

Although Q1 delivered a positive result, the figures were pulled down in Q2 as the crisis affected trading. However, the company tells us in the report turnover has begun to improve because education systems are beginning to reopen. Chief executive David Brooks said: “RM will look to play a key role in helping our customers’ transition to new ways of working.“

A positive long-term outlook

Looking ahead, in a world featuring Covid-19, the directors reckon the demand for RM’s products and services “is difficult to predict.” It seems clear that revenues and earnings will be well down for the current trading year to November.

But City analysts have also marked down anticipated turnover by around 14% for 2021, compared to those achieved in 2019 before the crisis. And they’ve pencilled in earnings about 40% lower.

Meanwhile, the share price at today’s 232p is around 20% below its level at the beginning of the year. And that throws up a forward-looking earnings multiple of almost 15 for the trading year to November 2021. That rating is higher than the 10 or so I’m used to seeing and appears to factor in full trading recovery for RM.

Through the ongoing crisis, RM plans to be flexible in managing its costs and will keep operating models “under continuous review.” The long-term outlook is positive. And I reckon the firm’s operations will recover and grow over time. Right now, I’m watching the stock closely.  

I like the firm’s consistent record of dividend-raising delivered over the past few years. Since 2013, the shareholder payment has risen by more than 112%. And the share price is around 145% higher than it was six years ago too. Shareholders over the period have done well.

Fast-growing international sales

The story behind RM is one of weaker UK sales lately and a fast-growing international operation. Around 17% of overall revenue came from abroad during 2019. The company is engaged in a programme designed to adapt operations to the evolving requirements of the education sector. And at the beginning of 2019, the directors set out four strategic themes, which they believe will help focus the firm and enable the creation of long-term value for shareholders.  

The themes are Intellectual Property & Technology Development, International Growth, Innovation, and Efficiency & Simplicity. I reckon that’s a good list and could help the business grow from where it is today.

Today’s full-year report for the period to 30 November kicks off with the headline: “Steady progress and continued international momentum.”  Overall revenue rose just 1% compared to the year before but, within that figure, revenue from abroad increased by 18%, suggesting decent progress with at least one leg of the list of themes.

Adjusted diluted earnings per share moved 2% higher and the directors pushed up the total dividend for the year by 5%, continuing several years of annual rises in the payment. Chief executive David Brooks said in the report the year has been “solid” with revenue and operating profit being underpinned by a “stronger” performance from the firm’s two technology divisions. However, the third division, Resources, had a “challenging” year.   

Acquisitive growth

During the period, RM acquired Australian company SoNET, which provides Software as a Service platforms mainly to the education and government sectors.  The directors reckon SoNET’s e-testing software “augments” RM’s existing exam e-marking capability. Now the firm can offer end-to-end digital assessment services.  Acquiring SoNET’s technology means RM can explore new market opportunities and “accelerate” the growth of the Results division.

Looking ahead, Brooks reckons RM is “well placed” in the year ahead to address the market opportunities “across each of its divisions.” City analysts following the firm expect earnings to increase by a low single-digit percentage in the current trading year to November. And they’ve pencilled in another 5% increase in the dividend.

Meanwhile, with the share price near 280p, the forward-looking earnings multiple for the current year is sitting close to 10.5 and the anticipated dividend yield is about 3%. Those earnings should cover the payment more than three times.

The valuation looks reasonable to me, and I reckon the company has the potential to grow in the years ahead.

Understandably, most private investors gravitate towards the biggest and best-known companies (think Lloyds Bank, Royal Dutch Shell and GlaxoSmithKline), either through buying their shares directly or by purchasing a fund that focuses on holding a selection of these giants.

Today, however, I’ve picked out two far smaller businesses that not only have great income credentials but also, I suspect, offer the possibility of decent capital growth.

Focused on 2020

Based on recent trading, you might wonder why I’m positive on “image capture and content creation solutions” provider (that’s camera accessories, supports, prompters, monitors and lighting to you and me) Vitec Group (LSE: VTC).

Results for the first half of 2019 weren’t particularly inspiring. The US/China trade war and “some disruption to the photographic market” left revenue pretty much flat at £184.2m compared to the previous year. Pre-tax profit fell almost 16% to £16.6m and net debt increased to £108.4m from £43m, partly as a result of acquisitions.

In spite of this, it’s important to highlight that Vitec made no changes to its FY19 guidance. At 14%, adjusted operating margins also remained decent and in line with the company’s mid-teens-digit target.

By far the biggest positive in my view, however, was the fact that wireless chip maker Amimon (purchased in November last year) has now been fully integrated. This means Vitec’s plan to launch wireless video products into the broadcast sports market next year is on track. This development, coupled with the company being heavily involved with the Tokyo Olympics (as well as the US Election), leads me to suspect that the current valuation of 14 times earnings could turn out to be rather cheap by next year.

And the dividends? The 3.1% yield might appear very average, but it’s been consistently hiked over the years — exactly what those looking for regular income should be searching for. What’s more, this year’s cash returns should be covered well over twice by profits.

Galloping dividends

A second stock that I think warrants further investigation is RM (LSE: RM) — a company that supplies products and services to education markets, both here and abroad. 

This small-cap’s shares have been in excellent form over the last 12 months, rising a little over 50%. Based on July’s interim results, I think there could be more good news ahead.

Although revenue rose only 1% (to £95.5m) thanks to “a difficult UK schools market“, international sales rose 33%. Adjusted operating profit also jumped 17% to £9.7m, helped in part by improvements in RM’s Results and Education divisions. Margins rose to 10.2% from 8.8% and net debt dropped by £2.2m to £21.2m. Lots of good numbers there.

The great thing about all this is that RM’s shares can still be picked up for just 11 times expected earnings. Considering the company generates high returns on capital employed on a consistent basis, that looks rather cheap to me. 

Like Vitec, RM’s 3% yield isn’t exactly worth writing home about on its own. Look underneath the bonnet, however, and you’ll discover that the business has doubled its total cash return since 2013 and is expected to grow this amount by another 10% in FY20. Forget the sky-high yielders elsewhere in the market — this is what should get dividend hunters salivating.

One well-known share research website classifies some shares as super stocks. To qualify, a share must score well against value, quality and momentum indicators. I think picking shares like that can be a decent strategy. Here are three of my favourites right now.

Infrastructure investment

3i Infrastructure (LSE: 3IN) is a closed-ended investment company that invests in infrastructure businesses and assets in the UK and Europe. The company aims to deliver shareholders a sustainable total return of 8-10% per annum, with some of that coming from its progressive dividend policy.

A glance at the share price chart reveals the stock has been moving steadily up for some time, which I find encouraging. At the recent 287p, the share price is just over 30% higher than it was a year ago. But even now, the valuation isn’t excessive with the forward-looking price-to-earnings multiple for the trading year to March 2020 running just below 13. There’s also a dividend yield sitting a little over 3%.

The company manages its assets in sectors such as transportation, power, utilities, energy and healthcare, buying and selling businesses and investments at optimum times. I think such nipping and tucking looks set to keep the total returns rolling in for shareholders in the coming years.

Credit lending

Morses Club (LSE: MCL) is a UK-focused, home-collected credit lender operating via a network of self-employed agents who collect repayments on the doorstep on a weekly follow-up basis. The firm provides non-standard credit, which is usually unsecured, for borrowers who have difficulty obtaining credit from mainstream lending institutions.

At 175p, the stock has risen a little over 10% since the beginning of the year, which is a handy return when combined with the forward-looking dividend yield of almost 5% for the trading year to February 2020. City analysts following the firm expect double-digit percentage advances in earnings and in the dividend for the current trading year. And the directors expressed a confident outlook with an update at the end of February.

Meanwhile, the valuation looks undemanding with the forward-looking earnings multiple running just below 12 for the current trading year. I think the shares are attractive.

Education services and products

RM (LSE: RM) supplies products and services for the education market in the UK and abroad. At the end of March, the company released a steady-as-she-goes trading update and City analysts following the firm expect single-digit increases in earnings and the dividend going forward.

At 231p, the stock is around 14% higher than it was at the start of the year. The forward-looking dividend yield is also running just below 4% for the trading year to November 2020. But the dividend is a real success story. Over five years, the payment has increased by just over 100% and I think the firm is capable of delivering a similar return from the dividend in the years to come.

Meanwhile, the valuation looks undemanding with the forward-looking earnings multiple running just below nine for the trading year to November 2020. That looks attractive to me, given the sector has defensive qualities.

In other words, if I save in a cash ISA, I’m going to lose money after adjusting for the eroding effect of inflation.

Why shares could be better

So instead of saving cash, I’d rather invest in dividend-paying shares. Dividends from many listed companies are much higher than the rates paid by cash ISA accounts and, on top of that, many firms raise their dividend payments each year too – you don’t get that benefit from a cash ISA!

One example of a stock that looks attractive to me right now is education products and services supplier RM (LSE: RM). At the recent share price of 240p, the dividend yields around 3.2%, which knocks the spots of any cash ISA. But the best bit is that the dividend payment has increased by more than 120% over the past six years. If that growth in the dividend continues, you could earn a handsome return by investing in the company’s shares from the dividend payments alone.

However, it gets even better. A rising dividend like that tends to take a share price up with it to reflect the value building in the underlying business, and RM’s share price has risen by more than 200% over the previous six years as the dividend has been growing. So, if you’d invested in RM six years ago you’d have more than three times the money you originally invested by now.

It sounds easy, doesn’t it? But there is a catch. Investing in shares carries more risk than investing in cash accounts. There is the risk that the underlying business behind a share may not go on to perform as well as we expect it to. You could even lose money by investing in shares if things go wrong for a company. But I reckon those who invested in RM six years ago are glad they did. I think the key to successful investing outcomes is to keep a close eye on the trading updates and financial reports that a firm issues and today’s full-year results report from RM is encouraging.

Strong trading

The company has been doing well. In the trading year to 30 November 2018, revenue rose 19% compared to the year before and adjusted diluted earnings per share shot up 22%. The balance sheet strengthened during the year with net debt falling almost 57% to £5.8m suggesting that cash is flowing into the business to back up the firm’s profits. The directors expressed their confidence in the outlook by pushing up the all-important total dividend for the year by a whopping 15%, which is a great outcome for existing investors.

The year’s progress came from organic growth and from a previous acquisition that the company integrated during the year. All three divisions made strong progress in the period and I feel confident that the company’s finances are in good shape. Meanwhile, the shares are changing hands on a forward-looking earnings multiple for 2019 of just under 10, which looks like good value to me.

One business held in high regard by fund manager Neil Woodford is subprime lender Provident Financial (LSE: PFG). Woodford’s funds have a 25% stake in this firm, which can trace its history back to 1880.

Although the company has diversified into online lending and credit cards, doorstep lending remains at the core of the business. This division went through a difficult period in 2017, when plans to bring self-employed collection agents in-house went badly wrong. But the firm’s recovery seems to be going well and chief executive Malcolm Le May has promised a return to regular dividends in 2019.

The market remains cautious about this business and Provident’s share price is still nearly 70% lower than it was two years ago. As a result, the shares offer a forecast dividend yield of almost 7% for 2019. I think this could be a buying opportunity.

High returns, low valuation

Provident is expected to generate earnings of 51p per share in 2018, rising by 26% to 64p in 2019. This puts the stock on a 2018 forecast price/earnings ratio of 11.9, falling to a P/E of 9.4 in 2019.

That seems cheap to me for a business that has historically generated a return on equity of more than 30%. This measure of profitability is widely used for financial stocks and compares a company’s profit with its net asset value. A high return on equity (RoE) generally indicates good cash generation, supporting dividends and growth.

Using analysts’ forecasts as a guide, my sums suggest an RoE of 17% for 2018, and a higher figure for 2019. At current levels, I’d rate the shares as a long-term buy.

This small-cap is beating forecasts

Shares of education services supplier RM (LSE: RM) are up by 10% at the time of writing after the firm said that full-year profits should be “slightly ahead of expectations.”

RM’s share price has fallen by more than 15% since early July as the Brexit sell-off has hit the stock market. But the company’s performance has remained strong, as today’s statement confirms.

The business has three main divisions: Resources, Results and Education. These supply teaching aids and curriculum resources, electronic testing services, and IT systems for schools.  

Chief executive David Brooks says that all three divisions have delivered a “positive performance” and that the group’s net debt fell by £7m to just £6m last year.

The group’s interim results in July showed that sales rose by 33% to £94.9m during the six months to 31 May, while adjusted operating profit climbed 27% to £8.3m. These figures were boosted by the acquisition of The Consortium, a rival educational supplies business formerly owned by Connect Group.

This deal seems to have worked out well, so far. However, this autumn’s sell-off has left RM stock trading on just 8.5 times 2018 forecast earnings, with a dividend yield of 3.8%. I think that may be too cheap to ignore, and would rate the stock as a buy.

Indeed, over the period, the shares have returned 100% excluding dividends. Including dividends, shareholders have seen a return of 125%.

And it looks as if these returns are set to continue as today the company announced, alongside its final results for the period ending 30 November, a 25.9% increase in adjusted diluted earnings per share and a 10% increase in the proposed full-year dividend of 26.6p per share. 

Successful year 

This dividend hike follows a healthy year for the supplier of technology and resources to the education sector. Overall, revenues for the period increased by 11% to £185.9m and adjusted operating margins increased from 11.2% to 11.9%. These operational improvements helped the company deliver adjusted operating profit growth of 17.4%. 

RM’s performance received a substantial boost in the year after the company acquired the education & care business of Connect Group plc for £59m. The acquisition contributed revenues of £27.8m for the period. Even though the group did borrow to acquire this growth, robust cash generation is already allowing it to pay off creditors. Before the acquisition, RM’s net cash balance was £40m. By year-end, net debt had fallen to £13.4m implying a reduction in net debt of £5.6m over the past few months. 

Going forward City analysts are expecting further growth from the company. Following this year’s strong performance, earnings per share growth of 9.1% is projected for 2018 indicating that the shares are trading at a discount forward P/E of only 8.3. A market-beating dividend yield of 4.3% is also on offer. 

So overall, if you’re looking for a cheap growth stock with a dividend growing at a double-digit percentage every year, RM could be the company for you. 

Changing with the times

Another dividend stock that’s on my radar today is NAHL (LSE: NAH). This personal injury-focused law firm has fallen out of favour with investors over the past few years, due to government attempts to clamp down on the sector. However, management has been trying to diversify, and so far this strategy is succeeding, with the group’s critical care division and residential property arm producing steady results.

These efforts are expected to help the company continue to grow in a harsh environment. Over the next two years, City analysts expect revenues to expand by around 9%, although net profit is expected to slide by 25% over the same period. 

Still, NAHL’s discount valuation and high-single-digit dividend yield more than make up for this earnings decline. The shares currently trade at a forward P/E of 9.3 and support a dividend yield of 7.3%. The payout is covered 1.5 times by earnings per share, and the group has a relatively stable balance sheet with net gearing of just 16.2%, leaving plenty of room for manoeuvre. 

It could also be the case that City expectations for the company’s outlook turn out to be too pessimistic. Indeed, only a few weeks ago the firm announced to the market that trading during the fourth quarter had exceeded expectations and, as a result, earnings for the full year would beat City estimates. With this being the case, I’m optimistic about NAHL’s future.