A Stocks and Shares ISA allows UK residents to invest up to £20,000 a year tax-free. Not only can it help to maximise returns but allows investors to choose whatever types of assets they want.
From stocks and shares to commodities to exchange-traded funds (ETFs), a variety of assets are available. I’m a particular fan of dividend-paying stocks because they have the potential to provide a steady stream of passive income.
The following three income stocks have been profitable for me recently. I think they would be a worthwhile consideration for those looking to invest via an ISA.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Reckitt Benckiser
My most recent dividends came from my Reckitt Benckiser (LSE: RKT) shares on 13 September. Unfortunately, the company hasn’t had the best time lately. Down 16% this year, it’s still recovering from troubles related to the acquisition of nutrition company Mead Johnson and the subsequent Enfamil lawsuit. Despite its insistence that the baby formula is safe, the fallout has cost the firm dearly.
I’m not too concerned though because I expect it will bounce back. It’s one of the largest consumer businesses in the UK, producing top brands like Nurofen, Air Wick and Dettol. The alleged health issues related to Enfamil have increased awareness of a potential risk, while the price dip has provided a buying opportunity.
The shares are trading at 42% below fair value based on cash flow estimates with a forward price-to-earnings (P/E) ratio of 15.4. My main concern is a high debt load, which could threaten dividends. That could become a problem if the forecast earnings growth doesn’t materialise, so I’ll keep an eye on that.
Lloyds
My Lloyds Banking Group (LSE: LLOY) shares also paid out dividends this month, just a few days before Reckitt. It’s one of the largest, most well-established banks in the UK and has an attractive 5% dividend yield. That alone is a strong value proposition.
Until recently, growth hasn’t been spectacular. It only recovered its losses from Covid this year with almost no growth between 2021 and 2023. But it’s up 22% this year, despite putting aside almost half a billion pounds for the vehicle financing probe in February.
The banking landscape in the UK is changing, with new digital banks challenging the norm. But the big banks aren’t going away soon. And with a price-to-book (P/B) ratio of only 0.8, I think Lloyds is undervalued and in a good position to go up.
City of London Investment Trust
I received dividends from my City of London (LSE: CTY) shares on 30 August. I only bought the shares recently but already they’ve started paying off handsomely. The share price is up almost 10% this year but much like Lloyds, it did little in the previous three.
In 2021 and 2022 it managed to return more than its net asset value (NAV) but in 2023 it returned less — meaning it performed worse than the sum of its assets. It’s also worth noting the trust has a 0.37% annual ongoing charge, which eats into returns.
Still, with a 4.7% yield and 58 consecutive years of increasing dividends, price growth is barely a concern. It’s one of the most reliable dividend-paying trusts in the UK, with top holdings including BAE, Shell and Unilever.
