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Why Banco Santander SA Beats Both Lloyds Banking Group PLC And Royal Bank of Scotland Group plc As A Top ISA Buy

So you want to shelter your investment cash in an ISA and wish to buy shares in Lloyds Banking (LSE: LLOY) (NYSE: LYG.US) or Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US).

Well, you don’t need me to tell you that both names remain fraught with uncertainty.

Complex accounts, ongoing restructures, mis-selling scandals, political grandstanding, bonus backlashes…  

…not to mention a lack of dividends.

In my view, only when the state-backed banks start to pay handsome payouts can the shares begin to shake off their speculative nature and become proper investment.s

Trouble is, hapless long-term Lloyds and RBS investors haven’t seen dividends since 2008.

LloydsLloyds might be closer to paying a dividend than RBS. Within its latest results, the Black Horse bank said it “expects… to apply to the Prudential Regulatory Authority in the second half of 2014 to restart dividend payments, commencing at a modest level.

A “modest level” does not sound so great, and brokers are guessing Lloyds will announce a 2p per share dividend next year. The possible yield at 81p is 2.5%.

rbsMeanwhile, RBS claimed in its latest results:

We are confident that the actions announced today will deliver a customer-focused bank with undoubted capital strength, the potential for attractive returns and an ability to recommence dividends over the medium term.

I reckon “over the medium term” translates to ‘between three and five years’. And so RBS’s dividend yield remains a firm 0%.

Still, there is one high-street bank that continues to pay a healthy dividend — and a dividend that was NOT cut during the financial crash of 2008.

santanderBanco Santander (LSE: BNC) operates about 1,200 former Abbey National, Alliance & Leicester and Bradford & Bingley branches, and employs around 24,000 people in the UK.

True, the Spanish bank produces only 17% of profits in Britain, with the rest generated in Brazil, Mexico, Chile, the United States and throughout the rest of Europe.

Still, such diversification — and canny family management — has helped the bank sustain its payout for the last six years. What Santander likes to call “shareholder remuneration” is currently paid out at €0.6 — or roughly 50p — a share.

With Santander’s London-traded shares at 553p, the yield is an astonishing 9%.

Sure, Santander has had its problems, and that 9% income may indeed be too good to be true. But surely any major threats to the dividend would have emerged by now.

And even if the payout is halved, the shares would yield more than Lloyds. And it would need a full axing to match the income available at RBS.

Of course, I would not invest my entire ISA into Santander -- even with its mighty yield.

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Maynard does not own shares in any of the companies mentioned.