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Two income stocks I’d buy for an ISA

Investors, as far as they can afford to, should look to make maximum use of an ISA as it is a tax efficient way to invest up to £20,000 a year. Historically the lead up to the ISA deadline has seen share prices rising as investors rush to top up their Stocks and Share ISAs by April 5. Whether Brexit uncertainty makes that more or less likely this year isn’t clear. But Brexit aside and thinking longer-term – as I’d advise investors to do – here are two shares I think would make ideal ISA investments.

On the march

Legal & General (LSE: LGEN) has made a great start to 2019; the share price is up over 20% so far. The company has benefited from the wider recovery of the stock market since the major slump near the end of 2018 and from its own positive results and momentum. 

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In its full-year results report last week, it said underlying profits rose 10% in 2018 to £1.9bn, with growth across all the major divisions. The board has recommended a final dividend of 11.82p, up 7% on the previous year. The biggest contributor to the business, the Legal & General Retirement division achieved operating profits of £1.1bn in 2018, up 22%, and all divisions grew during the year. Last year the company became the first in the UK to have over £1trn under management, which showcases what a good job management is doing in growing the company. 

What an investor gets with Legal & General is a diversified business paying a high dividend yield (currently around 6% despite the share price rise this year so far), with is trading on a price-to-earnings ration (P/E) that makes the share good value. The P/E is currently under 10. I’d buy.

Buying growth

Speciality chemicals firm Elementis (LSE: ELM) released full-year results this month and they showed that while market conditions remain challenging, revenues grew 5% in the year to 31 December to $822m, while adjusted pre-tax profits rose 3% to $113m.

For those investors fretting about Brexit, Elementis sources 96% of its sales from outside the UK and just one of its 21 manufacturing sites is in Britain. It should, therefore, be affected less than domestically-focused companies if Brexit continues to impact business confidence.

The concern for investors might be around the fact that after the acquisition last year of Mondo Materials for £380m, net debt nearly doubled. Many investors at the time baulked at the price of the deal – hardly a great sign for management. Cutting this debt and successfully integrating Mondo will be key to the short-term performance of the share price.

The yield at Elementis is starting from a lower base than Legal & General but that could well mean investors benefit from larger increases going forward. The current yield is near 4% which is still a good income for investors – remember that’s well above the rates offered by high street banks. On top of that, the shares have a P/E just over 12 so aren’t trading at a high valuation. A lower P/E reduces the risk for anyone adding the company to their ISA and I see it as a share with plenty of growth potential, even in troubled times.  

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Andy Ross owns shares in Legal & General. The Motley Fool UK has recommended Elementis. 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.