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Why I’d stash banking stocks and pharma stocks in my 2018 ISA

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The new tax year arrives in April, and with it comes a whole new tax-free allowance of £20,000. 

What that means is you’ll be able to invest up to £20,000 in your ISA in the 2018/19 tax year, and you won’t have to pay a penny in tax on any money you take out — regardless of how well your investments grow.

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Now that’s a significant sum and not many people will have that much to spare to invest every year, but using up as much of the allowance as you can is very much to your advantage.

It’s good to utilize as much of your existing 2017/18 ISA as you can in the next few weeks. But what should you then consider for the new one?

Cash is king

You might be surprised to learn that I rate the banking sector highly, despite the crash that knocked our economy for six. But it’s arguable that we really did need that short-term shock in order to shake up the excesses of the banking business, and I reckon we’re looking at a far safer sector than we’ve seen for decades.

My favourite of the big banks is Lloyds Banking Group, which is back to paying healthy and growing dividends, with yields of better than 6% currently forecast. There’s even been a bit of share price growth over the past five years, of 34%, and the shares are still lowly valued on a P/E of under nine.

HSBC Holdings is offering better than 5% and there’s decent earnings growth on the cards. Even Barclays shareholders are seeing a return to dividends — the yield is expected to reach only around 3.7% by 2019, but it’s growing rapidly and should be very well covered by eanrings.

I’d consider the smaller “challenger” banks too, which are sticking to safe UK-centric retail banking. Virgin Money Holdings is looking good value to me, on P/E multiples of under eight and with dividends modest at around 2.5%, but growing ahead of inflation.

Growing demand

The pharmaceuticals sector has also long been a favourite of mine, as demand for health services from ageing Western populations, coupled with increasing wealth in developing nations, should keep the profits rolling in.

The UK’s top two, GlaxoSmithKline and AstraZeneca, are still getting over recent hits through the expiry of some key patents and the resulting stiffer competition from generic alternatives, but both have been investing heavily in their drug development pipelines. 

And again, we’re looking at long-term generators of cash. Even throughout the patent-led down spell, both the giants kept paying out dividends that were firmly ahead of the FTSE 100‘s long-term average. 

As a return to earnings growth is edging closer for AstraZeneca, analysts are forecasting dividend yields of 4.3%. They wouldn’t be well covered yet and there is a bit of risk there, but I see underlying long-term safety.

And at GlaxoSmithKline, which has already recovered to put in a couple of years of growth, the prognosis is for yields of better than 6%.

There are also plenty of newcomers to the pharma and biotech fields, which are researching potentially exciting areas, if you want to add a bit of excitement to your ISA. But if you went for one of the biggest and best from each sector, I think you’d be off to a great start.

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Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, Barclays, HSBC Holdings, and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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