Investors wanting to use up their tax-free ISA allowance before the end of the tax year now have less than two weeks: it’s time to decide where to invest your top-up cash, before it’s too late.
Today, I’ll take a look at three high-quality income stocks that could improve the diversity of your portfolio, and provide an attractive, sustainable dividend income.
Imperial Tobacco
Tobacco firms are perhaps the ultimate income investments: they have high profit margins, addicted customers, global brands, and require little capital expenditure in order to maintain sales.
Imperial Tobacco Group (LSE: IMT) is currently my preferred pick over UK peer British American Tobacco: Imperial trades on an attractive 2015 forecast P/E of 15 and offers a prospective yield of 4.5%, compared to equivalent figures of 17.5 and 4.2% for BAT.
Like BAT, Imperial enjoys considerable economies of scale, and should benefit in this regard from its upcoming US acquisition of Reynolds American and Lorillard.
Compass Group
Global catering outsourcing firm Compass Group (LSE: CPG) is not as well known among private investors as Imperial, despite its £20bn market cap and £18bn annual revenues.
This is a quality stock that’s on my own buy list: post-tax profits have risen by an average of 8% annually over the last six years, and the dividend has done better still, rising by an average of nearly 14% per year over the same period.
Although Compass’s 2015 prospective yield is just 2.4%, below the FTSE 100 average of 3.4%, the firm’s track record suggests that its dividend could grow faster than the index average, making Compass shares an attractive long-term hold.
easyJet
easyJet (LSE: EZJ) shares have risen by 42% over the last six months, so investors buying today need to accept the risk that the good news is in the price, and that future upside could be limited.
However, I’m not sure this is the case: I believe easyJet is one of the most attractive of the UK airlines, not least because the firm’s low-cost model generated an operating margin of almost 13% last year.
In contrast, mainstream peer International Consolidated Airlines Group only reported an operating margin of 5.5% last year, and even IAG’s most profitable airline, British Airways, only managed an adjusted operating margin of 8%.
Analysts expect easyJet to report earnings per share growth of 16% in 2015 and 13% in 2016, making the shares 2015 forecast P/E of 14 look fairly reasonable, especially given their prospective yield of 3.2%, which is nearly double that of IAG.
