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Why these two stocks are my top two ISA holdings

Image: BAE Systems.

With the 2016/2017 ISA deadline just a week away, today I thought I’d give Motley Fool readers an insight into how I invest in my own ISA.

Let me start off by explaining that within my ISA, I employ a dividend growth investment strategy. This means that I invest in companies that consistently increase their dividend payouts over time. I’ve found that this strategy works well for me, as I receive an ever-increasing stream of dividends that I can reinvest back into the market, capitalising on the power of compounding to build my wealth slowly over time.

With that in mind, here’s a look at my top two holdings. 

Legal & General Group

Insurer Legal & General Group (LSE: LGEN) is currently my largest holding.

With a huge dividend yield of 5.8%, Legal & General is one of the best dividend stocks in the FTSE 100 in my opinion, and I look forward to the sizeable dividend payments the company sends my way regularly.

I’ve owned Legal & General for a few years now, and while the share price hasn’t risen much in that time, I’m more than happy to hold the stock patiently, pocketing the big dividend cheques twice a year. I believe that if Legal & General continues to grow its earnings and raise its dividend, the share price will eventually move higher.

Having cut its dividend in the global financial crisis, the company has increased its dividend significantly in recent years, lifting the payout from 7.65p in FY2012 to 14.35p in FY2016. And while the current yield of 5.8% might be approaching a level at which some investors are doubting the dividend’s sustainability, Legal & General’s dividend coverage ratio is currently 1.55, suggesting there’s little need to panic about a dividend cut.

Recent results, for FY2016,  were good, with pre-tax profits rising 17% and earnings per share up 19% to 22.2p. And the insurer increased the full year dividend by 7%, which is exactly the kind of dividend growth I like to see in my stocks. Although management predicted future market volatility, it also stated that “we believe the opportunities available to the group, primarily in the UK and US, remain attractive.”

With that in mind, I’m happy to keep Legal & General as my largest holding for now.

BAE Systems

The next largest holding in my ISA is BAE Systems (LSE: BAE).

I purchased shares in the defence giant just over two years ago at 480p, as the stock screened up as good value and the dividend yield then was 4.3%. And since then, the share price has risen around 35%, for a total gain including dividends of nearly 45%. Not bad for a blue-chip stock.

My reasoning for purchasing BAE Systems was that with such a strong undercurrent of geopolitical uncertainty in the world today, demand for defence should remain robust. And so far my theory is looking pretty good, with Donald Trump planning to increase US defence spending by a huge $54bn for fiscal 2018.

BAE Systems reported solid full year results recently, with pre-tax profit jumping to £1.15bn from £1.09bn, and order intake increasing from £14.9bn to £22.4bn. The final dividend was increased by 2% to 21.30p. 

Management stated that “with an improved outlook for defence budgets in a number of our markets, we are well placed to continue to generate attractive returns for shareholders,” and as a result, I’m happy to hold BAE Systems in my ISA.

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Edward Sheldon owns shares in Legal & General and BAE Systems. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.