Forget a cash ISA! I’d put this 5% dividend yield in my Stocks & Shares ISA

Why I’m optimistic about this firm’s future prospects and its potential to recover and grow.

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Cash ISAs pay terrible rates of interest, and it’s unlikely that you will be able to compound your money enough to keep up with inflation if you use them for your savings.

Instead, I’d buy shares for my Stocks & Shares ISA because the dividends they pay can be reinvested and compounded in a similar way to how interest builds up in an ISA cash savings account.

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Growing from an inflection point

I like the look of FTSE 250 manufacturing company Essentra (LSE: ESNT), which has a dividend yield running close to 5%. The share price has dropped by around 60% since its peak around four years ago but has been clawing its way back up through most of 2019, so far. But the weakness in the price is part of the reason for the high dividend yield, so I see it as an opportunity for investors.

There have been operational problems causing profits to dip. But in today’s half-year results report, chief executive Paul Forman said that in 2018, Essentra reached an “inflection point” and the firm is now set for sustainable growth in revenue and profits. On that theme, I find today’s figures to be encouraging.

Like-for-like revenue for the first half of the year to 30 June moved 1.3% higher than the equivalent period last year, and adjusted basic earnings per share at constant currency rates lifted by 7.5%. The directors maintained the interim dividend, which is reassuring given all the ongoing changes in the business.

Streamlining for growth

Indeed, the firm has been busy nipping and tucking operations, involving selling off underperforming divisions and acquiring new bolt-on businesses. But Essentra is no stranger to building growth via the acquisition route and has a long history of taking over other firms and businesses. From its roots as a manufacturer of filters for cigarettes, which it still produces, Essentra now claims to be a “leading global” provider of “essential” components and solutions with the three global divisions of Components, Packaging and Filters.

Today the firm reported “positive” momentum maintained in its Packaging division, which “returned to growth” in the last half of 2018. Paul Foreman explained in today’s report that the firm is in the process of “simplifying” operations. So far this year the subdivisions of Pipe protection, Extrusion, Speciality Tapes and Card Solutions have all been sold off. The Kilmarnock and Largo consumer packaging sites were also closed down at the end of last year. And on top of that, Essentra made a couple of acquisitions in the first six months of 2019.

I reckon simplification and increased focus is almost always a good thing in business, which makes me optimistic about the firm’s future prospects and its potential to recover and grow. At the recent share price of 408p, we can pick up a few of the shares on a forward-looking earnings multiple of just over 15 for 2020, which I’m inclined to do. Meanwhile, the anticipated dividend yield is around 5%, which looks attractive to me.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Essentra. 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.

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 considered, so you should consider taking independent financial advice.

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