It’s not often you can get away with not paying tax, but your annual ISA allowance allows you to do exactly that. Pick the right share and lock it way in an ISA for a decade or two, and you could see a healthy return on your initial investment that the taxman can’t touch.
So, what makes a good share for an ISA? Ideally, it needs to be one that will appreciate in capital value. But re-investing dividends is also a great way to generate money, so a high-yielding share makes a great choice, too.
Here’s why I think Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) would make a great candidate for your 2014 ISA.
A difficult few years
Firstly, Shell is a huge company. Really huge. With a market capitalisation of over £140bn, it’s the biggest company in the FTSE. That means it has the enormous resources needed to compete in the global oil and gas business, and is able to make major investments for the very long term.
True, Shell has had a difficult few years, due to a combination of factors, including some over-ambitious expansion, escalating exploration and production costs, and over-supply in the LNG market.
And a shock profit warning back in January, in which the company said that fourth-quarter profits would be ‘significantly lower’ than recent levels, hasn’t helped matters. As a result, Shell’s share price lags slightly behind the FTSE 100 index over the past five years.
But that’s relatively short term, as these things go, and Shell has been busy addressing the issues that have bedevilled it of late.
Rewarding shareholders
It’s been disposing of unprofitable and non-core assets. Businesses both upstream and downstream have already been sold off, with more sales to come, netting billions that Shell can re-invest in its core operations or, as some analysts are predicting, use to reward shareholders with further buybacks.
And new chief executive Ben van Beurden (he took the helm at the start of this year) is busy being the proverbial ‘new broom’. He’s already cutting a swathe through Shell’s spending and says he aims to cut last year’s £46bn of capital expenditure by around 20%. Mr van Beurden’s focus will be on increasing efficiencies, rather than going all-out for expansion, which should help reassure the market about the company’s prospects.
Shell is currently on a price-to-earnings ratio of 10.7, not far above the sub-10 bargain-territory, and is much cheaper than the Oil & Gas sector average of 13.25.
And whilst Shell will never be a barnstormer of a growth share — it’s far too big a company — analysts are forecasting earnings-per-share growth of around 33% for this year, which could fuel decent share price growth, and should ensure the dividend.
Growing dividend = growing ISA
Ah yes, the dividend. Shell’s forward dividend yield is around 5%, which is over 40% higher than the average FTSE 100 yield of 3.5%, and far in excess of what savings accounts are currently paying. And Shell has a long record of maintaining and increasing its dividend, which provides reassurance that the payouts will continue for years to come.
So, even if Shell’s share price growth is only modest — as you might well expect from such a huge company — if you re-invest those meaty dividends, the total growth should outstrip the FTSE over the long term. And best of all, if it’s in an ISA, it’s all yours, tax-free.
