Why Royal Bank of Scotland Group plc Should Be A Candidate For Your 2014 ISA

Royal Bank of Scotland Group plc (LON: RBS) could reward you well over 20 years.

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rbsWith 2014 ISA time fast approaching, I’m looking around the top FTSE 100 shares to see which ones I think you should consider — and I’ll be warning you off a few of them, too.

Today I’m turning my attention to Royal Bank of Scotland Group (LSE: RBS) (NYSE: RBS.US), and it’s one that certainly passes my key criteria.

Long term

For me, an ISA is best used as part of a decades-long strategy that seeks companies with many years of earnings dividends ahead of them, so I look for solid companies in industries that should go on forever. Banking is one such industry, and RBS looks to be well on the road to a sustainable future.

Over the worst

Here’s what the dramatic last five years were like, together with forecasts for the next three.

Dec Pre-tax EPS P/E Dividend Yield
2008 -£40,836m -431p n/a 0p 0%
2009 -£2,647m -132p n/a 0p 0%
2010 -£399m 5.0p 78.1 0p 0%
2011 -£1,190m -0.1p n/a 0p 0%
2012 -£5,165m 6.3p 51.5 0p 0%
2013* -£3,458m -15.5p n/a 0p 0%
2014* £3,571m 24.8p 13.8 0.5p 0.1%
2015* £4,644m 28.4p 12.1 4.4p 1.3%

* forecast

Now, that was a staggeringly bad few years. But the past doesn’t matter for your 2014 ISA allowance. So what if there’s another big banking crisis in the future? Well, any industry or any company can suffer a disaster — the trick is to keep your ISAs diversified over the years, and so minimise the chances of any single investment going bad.

And we really should be over the worst of it now, with a return to decent profits forecast for this year and next.

Show us the cash!

fivepoundcoinsHow much might £1,000 invested in RBS in your new 2014 ISA be worth in another 20 years?

If we assume shares will grow at an average of 6% per year over the next 20 years, which doesn’t seem too far-fetched, then that alone would turn an initial £1,000 into £3,200 in 20 years — and by comparison, a cash ISA offering a typical 1.7% would turn your grand into just £1,400.

Dividends make a big difference, of course, but it’s hard to guess what RBS’s likely long-term yields will be. But even if they stuck at the measly 1.3% forecast for 2015, if you reinvested it every year your total after 20 years would be over £4,000. And a yield around the FTSE average of 3% could bag you more than £5,500 over the next two decades.

And if it’s protected in an ISA, there won’t be a penny of tax to pay!

Buy the bank, don’t save in it!

Of course, this is just guesswork, and there’s no certainty what an investment will be worth — but an ISA investment in RBS shares is very likely to beat cash in one of its savings accounts!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Alan does not own any shares in Royal Bank of Scotland.

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