Dividend heroes that can TURBO BOOST your shares Isa

Higher interest rates may make cash a more exciting proposition for savers now than it has been since before the 2008 financial crisis.

But the case for building an Isa around a core of dividend-friendly investments still remains a powerful one, offering investors the opportunity to earn superior overall returns over the long term – all tax-free.

While stock prices around the world have been wracked in recent weeks by fears of a banking crisis and a possible economic slowdown as companies lack access to credit, many companies remain in good shape financially.

As a result, their ability to continue to pay shareholders healthy dividends has not been compromised – although growth in payments may be limited if corporate earnings and revenues come under pressure.

While most investors identify dividends with the UK stock market – and in particular with companies such as banks and oil producers – the dividend universe has expanded considerably.

This gives investors who would like to receive a portion of their returns in the form of income more choice.

Now companies operating from countries such as Australia, Japan and a number of emerging markets regularly pay shareholder dividends.

The United States is also home to a number of companies that are dividend-friendly – some have raised their dividends for more than 50 years. They include Johnson & Johnson – maker of well-known household products such as baby oil and plasters – and Colgate-Palmolive, among others.

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Why are dividends so attractive to investors?

Dividends are a powerful source of investment return in an Isa, especially if they are automatically reinvested within the plan – rather than being considered an income stream.

This is because the reinvested dividends buy more shares or build larger fund holdings, allowing for greater income distribution in the future, plus a higher return on capital.

This combination of return on investment – ​​through reinvestment of income – was once described by the brilliant physicist Albert Einstein as the eighth wonder of the world.

Most Isa investors choose to go down this path, not necessarily because of what Einstein said, but because they have no immediate need for the dividend income.

They are more focused on building up the total value of their Isa, and only turn on the income tap at a later age to supplement their pension finances. It’s a savvy strategy.

Recent analysis by investment platform AJ Bell confirms the positive impact of reinvested dividend income on returns within an ISA. It looked at how an investment ten years ago in an average UK equity income investment fund (held in an Isa) compares to an equivalent contribution in an average cash Isa.

In both cases, the dividend income and savings interest are assumed to have rolled up — not as they were received. As their name implies, UK mutual funds aim to provide a mix of income and capital return from a portfolio of dividend-friendly UK stocks.

The equity income option is definitely winning, although the investment along the way was not without moments of anxiety – for example, the sharp stock market correction in March 2020 leading up to the lockdown.

AJ Bell says an investment of £10,000 in the average UK equity income fund in March 2013 would have resulted in an Isa pot of just over £16,670 – an average annual return of 5.2 per cent.

The money Isa would have turned £10,000 into £11,181 – more than £5,000 less. Even when AJ Bell reworked the numbers and looked at what the average cash would have brought Isa if it had paid interest rates over the entire ten-year period that were more in line with today – 4 pc. -, UK equity income still triumphed.

In this case, the cash Isa would have grown to just over £14,800 – still less than what the UK equity income investment brought in.

Laith Khalaf, head of investment analysis at AJ Bell, says: “In any year, dividends can be drastically cut and stock prices can fall, as seen during the pandemic.

“But in the long run, both stock prices and dividends rise, giving a double boost to total investment returns within an ISA.”

How are they going to boost my Isa?

Most Isa investors can get a dividend boost by sticking to the UK stock market. The annual income that the UK stock market as a whole currently generates is equivalent to approximately 3.6 per cent per annum (in the investment industry this is referred to as the dividend yield).

This is superior to any instant cash ISAs, with the best paying just over 3% annual interest (higher rates are available on fixed rate cash ISAs). Of course 3.6% is an average and there are no guarantees.

When stock prices rise, dividend yields fall, while companies can (and do) cut dividends, sometimes suddenly and unexpectedly.

ISA investors can gain exposure to UK dividends in several ways. For those who trust their own investment judgment, they can buy shares in individual companies known as dividend payers.

Many of these companies will not appeal to green investors given the companies they are involved with.

They include tobacco stocks like BAT, which is dividend payments up just over 1 pc last year. increased to £2,178 (his shares are currently trading just under £29).

A higher dividend in the first quarter of this year of 57.725p (last year it was 54.45p) bodes well for income seekers.

Others include oil giant BP, pharmaceutical company Glaxo-SmithKline, which makes products such as asthma inhalers, and insurer Legal & General — though BP and Glaxo are both shaving annual dividends in 2021 and 2022, respectively.

For most Isa investors, it makes more sense to build a portfolio of UK equity income funds that are in turn invested in a broad range of dividend-paying companies – including those already mentioned.

Data from fund controller Trustnet shows that many of these funds currently offer dividend income in excess of 5%.

According to AJ Bell, the best of the bunch are Evenlode Income, Man GLG UK Income and Montanaro UK Income. Over the past five years, they have a total return of 44, 23 and 9 pc respectively. generated – and an annual income of 2.8, 5.6 and 3.8 pc.

Alternatively, investors can purchase a fund that tracks the UK stock market, such as the FTSE 100 (consisting of the 100 largest companies by market capitalization) or the broader FTSE All-Share Index. By doing so, they would benefit from the average dividend generated by the market as part of their total returns.

Investment platform Hargreaves Lansdown likes Legal & General UK Index, which tracks the FTSE All-Share, and L&G UK 100.

Investors could buy a fund that tracks the UK stock market, such as the FTSE 100. That way they would benefit from the average dividend generated by the market as part of their total return

The best way to tap dividends

Many financial experts believe that mutual funds are the best foundation for an Isa ready to generate dividend income.

This is because these trusts – all listed on the London Stock Exchange – have the ability to control the dividends they pay to shareholders.

They do this by putting a portion of the income they earned from their holdings in the good years into their reserves – and then using it to supplement income payments to shareholders when the broader dividend environment is challenged (such as in 2020 and 2021). .

This ability to smooth income payments – unavailable to UK equity fund managers – has resulted in a phalanx of investment funds that have set dividend growth records stretching back 20 years, and in some cases more than 50 years.

Doug Brodie is CEO of Income Planners Chancery Lane, a company dedicated to building mutual fund income portfolios for clients – either within a self-invested personal pension or Isa.

He believes that equity income-focused mutual funds are “perfect” for Isas. “They allow you to buy exposure to between 40 and 80 dividend companies in a single transaction with a single purchase price,” he says.

“This not only means that buying becomes easier, but it also means that the investor automatically has a very high level of protection through diversification across different companies, sectors and countries.”

The Association of Investment Companies lists the 47 trusts that have had at least 20 years of dividend growth with the AIC.

What this list shows is that many of these income friendly mutual funds are global in their income range. According to global asset management group Janus Henderson, global dividends rose 8.4 percent last year and they predict further growth this year is “viable.” Don’t overlook them.

And finally…

If you want to boost your Isa with dividends, the best way to do it is to set up a share Isa with an online investment platform. Providers include AJ Bell, Bestinvest, Charles Stanley, Fidelity, Hargreaves Lansdown and Interactive Investor.

On all platforms, you can roll up dividends if you don’t quite need them yet – or you can take them as and when they are generated.

The choice is yours. It’s time to go on a dividend hunt.