I’ll say it again: choosing the cash ISA to store your savings is one of the most wealth-destructive decisions that you’re ever likely to make.
The consumer pages have been splashed with news of an interest rate war among the UK’s banks and building societies. However, this war is being fought with peashooters rather than bazookas as savings providers insult their customers with fractional rate increases.
I wouldn’t waste a single second scanning the tables to find the best payers out there. Rates will remain negligible for the foreseeable future, a reflection of the low interest rate environment that central banks have made the norm. You’d be much better spending your time looking for solid dividend payers instead, in my view.
On cloud nine
One brilliant income stock I’d start off with is British Airways operator IAG (LSE: IAG). The FTSE 100 flyer has spent a fortune on boosting its fleet and the wisdom of its expansion strategy was shown in latest monthly traffic statistics which showed it moved more than 10m passengers in October, up 7.9% year-on-year.
It’s easy to see why IAG is being so positive. Revenues grew 5.3% in the nine months to September to €16.3bn, it announced late last month, a result that drove operating profit before exceptional items 7.3% higher to €2.6bn. And the board has vowed to keep on splashing the cash by investing an extra €500m per year to help it generate annual profits of €7.2bn for the 2019-23 period, a vast upgrade from the €6.5bn it had targeted for 2018-22.
IAG is sailing through the turbulence created by higher fuel charges and rising industrial action, and as a consequence it’s expected to keep doling out meaty dividend increases over the medium term at least.
Last year’s full-year reward of 27 euro cents per share is predicted to rise to 30 cents in 2018 and again to 31 cents next year, figures that yield a chunky 4.3% and 4.4% respectively.
Cheap dividend heroes
To round things off, IAG is extremely cheap right now thanks to its ultra-low forward P/E ratio of 6 times, sitting well inside the accepted bargain benchmark of 10 times and below.
Redrow (LSE: RDW) is another underrated dividend giant I’d like to bring to your attention today. The troubles facing the London property market are well known and the FTSE 250 housebuilder alluded to this when it declared that that the activity in the capital “has remained subdued.“
Still, trading at Redrow remains pretty bright. It said that “we continue to see good demand in our regional businesses with most sites sold well in advance.” It noted that group forward sales were up 12% year-on-year as of November 3, at £1.2bn.
The company clearly isn’t without risk, but a forward P/E multiple of 6.1 times suggests to me that sentiment is far too negative. Redrow is still backed to keep on delivering profits growth by City analysts, even if at a lower rate than in prior years, and as a result dividends are predicted to advance to 30.1p per share from 28p last year. This results in a jumbo 5.5% yield.
The trading outlook may be difficult, but thanks to Britain’s gaping homes shortage I am tipping Redrow to keep delivering delicious shareholder returns long into the future.
