Any income or capital gains earned on investments held within a Stocks and Shares ISA are tax-free. In my opinion, that makes these wrappers the perfect vehicles in which to hold income stocks.
And with that in mind, here are three income stocks I’d buy for my Stocks and Shares ISA today.
Income stocks to buy
The first income stock I’d buy is SSE (LSE: SSE). This utility company is moving to become a renewable energy champion. The firm is looking to invest several billion pounds over the next few years, tripling its renewable energy output by 2030.
Not only should this help build the company’s earnings over the next few years, but it should also future-proof the business and its dividend.
At the time of writing, the stock offers a yield of 5.7%, and it looks to me as if this yield is here to stay as the firm invests for the future.
The main risk to the dividend is the potential for overspending. If SSE ends up splurging on assets that don’t earn a decent return, the firm may have to cut the payout to fill the hole.
Even after taking this risk into account, I’d buy the shares today.
Stocks and Shares ISA buy
The second company I’d acquire for a portfolio of income stocks is the trust, Scottish American Investment Co (LSE: SAIN).
This investment firm owns a portfolio of global dividend stocks, including Taiwan Semiconductor Manufacturing and UPS, among others.
What I like about this trust is that as well as income, it targets growth. So, while the company’s 2.5% dividend yield might not be the highest on the market, the potential for capital growth makes up the difference.
The trust has returned 81% over the past five years, excluding dividends, although investors should never use past performance to guide future potential.
The one downside of this approach is the cost. Scottish American charges an annual fee of 0.7%. Another challenge is the risk that the trust’s investment manager might pick the wrong stocks. This could hurt performance and is probably the biggest challenge of investing in actively managed funds.
Still, I’d buy the fund for my portfolio, considering its income and growth potential.
The final stock I’d buy for a Stocks and Shares ISA is 3i (LSE: III). This firm has two main business divisions, private equity and infrastructure. The private equity operation focuses on managing assets, mainly other businesses, to produce high returns.
Meanwhile, its infrastructure division owns and operates infrastructure assets intending to produce steady returns.
I think this combination of businesses is the perfect mix to capitalise on the economic recovery over the next few years. This is the primary reason why I’d buy the income share for my Stocks and Shares ISA. It currently offers a dividend yield of 3.3%, and the stock has the potential to produce some capital growth as well over the next few years.
3i is also exposed to some unique risks. For example, it may suffer if governments decide to nationalise the group’s infrastructure assets. Another wave of coronavirus could also hurt returns from the private equity business.
Even after taking these risks into account, I’d still buy right now.
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Rupert Hargreaves owns shares in the Scottish American Investment Co. The Motley Fool UK has no position in any of the shares mentioned. 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.