It’s ISA season, and if you’re like me, you’ve left your contributions right up until the last minute. Luckily, now there’s no longer a difference between a cash and shares ISA, investors do not need to rush to invest ISA money. However, investing the money as fast as possible is preferable with interest rates where they are today.
The best ISA investments
Due to the tax-free nature of an ISA, high-income stocks are the best way to invest your cash. As ISA money is effectively locked away after the tax year ends, it pays to select only the most defensive stocks, which have the most stable outlook with a history of returning cash to shareholders.
Up until the beginning of last year, BT (LSE: BT) was widely considered to be one of the market’s most defensive companies. Yes, the firm had its problems, but it looked as if management had a handle on things. However, over the past 12 months, cracks have started to appear in the company’s facade. An accounting scandal in Italy, a fight with Ofcom, ballooning pension deficit and rising indebtedness have all darkened BT’s outlook.
And now, while the company could still be considered to be a defensive buy, the number of analysts warning about the company’s future is growing.
Multiple concerns
Analysts’ primary concern is the pension deficit. BT has the second-worst funded pension scheme in the world according to MSCI, the index provider. With a gaping black hole of £9.5bn at the end of October, it is facing annual contributions of £1bn to meet its obligations. BT can address these requirements but when coupled with the firm’s commitment to continue hiking the dividend and fight Sky for customers, you have to ask what will break first?
Arguably, these are not near-term issues. For fiscal 2016, BT generated £5.2bn of cash, of which it spent £2.5bn on capex and £1.1bn on the dividend. These figures exclude spending on items such as broadcasting rights and pension contributions, but they show that BT still has some financial wiggle room.
No cut yet
Based on the above figures, BT’s dividend is unlikely to be reduced any time soon, but the risk of a potential reduction over the long term remains.
Shares in BT currently support a dividend yield of 4.6%, rising to 5.1% next year and 5.6% for the year after, based on the current price. As has happened so many times in the past with former dividend champions, if BT does decide to cut its payout, shares in the company could lurch lower, costing shareholders more in capital losses than they ever stood to make from dividends along the way. It’s this risk that puts me off. Personally, I’d rather invest in another dividend champion that is not facing so many difficult headwinds.
Overall, BT remains a dividend champion and could be a great pick for your ISA. However, there are other opportunities out there, which might better long-term buys.
