The best stocks to hold in your ISA are defensive income plays, dividend champions that will continue to produce a return for you year after year with no effort on your part.
Diageo (LSE: DGE) is a great example. As one of the largest alcoholic beverage companies in the world, with some of the most recognisable brands under its umbrella, Diageo has a product set few other businesses have, or will ever be able to replicate.
What’s more, Diageo is a truly global business. The maker of Johnnie Walker scotch and Smirnoff vodka generates 45% of its profits in the US, which means the falling pound has been a strong tailwind to group profits over the past two years. The group’s presence in China has also proved helpful with sales of Shui Jing Fang, its white spirits brand rising 75% year-on-year during the second half of last year.
For the six months to the end of December, the firm reported a 6% increase in pre-tax profits to £2.2bn on net sales of £6.5bn. Sales expanded 4.2% on an organic basis excluding acquisitions.
The fact that Diageo can achieve a 30%+ pre-tax profit margin shows, in my view, why this firm is such an excellent pick for your ISA. A pre-tax margin of 35% (the rest of the market has to make do with a margin of around 10%) means it has plenty of profit to reinvest in the business to drive growth and return to investors.
Indeed, last year management initiated a £1.5bn share buyback to return additional capital to investors alongside the 63.4p per share dividend. At the time of writing, the shares support a dividend yield of 2.6% and City analysts are expecting the payout to grow by around 10% to 71p over the next two years.
The one downside about Diageo is its valuation. Trading at 21 times forward earnings, the stock looks expensive compared to the broader market. However, I believe that this multiple is a price worth paying for a company that owns a portfolio of leading brands and is three times more profitable than its peers.
Another company that has similar qualities to Diageo, in my opinion, is AstraZeneca (LSE: AZN). Rather than a portfolio of leading drinks brands, however, Astra owns and is in the process of developing, a range of game-changing treatments for cancer patients.
In February, the US Food and Drug Administration approved one of its new treatments, Imfinzi, for treating stage three lung cancer patients who have already had chemotherapy. AstraZeneca has already received approval to use the drug for patients with advanced bladder cancer and is waiting on the results of another study to assess if it can improve overall survival rates for those with non-small cell lung cancer. These figures were expected to be published in the first half of 2018, but they now won’t be released until the second half.
Still, City analysts believe that as Astra’s new treatments come to market, earnings per share could rise to 280p by 2019, up from last year’s reported figure of 152p. Based on this projected growth, the bespoke nature of the company’s products, and its 4.1% dividend yield leads me to conclude that it is an excellent pick for any ISA.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended AstraZeneca and Diageo. 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.