ISA ideas for investors hunting income

Our most-bought ISA picks in the current tax year confirm that dividends never go out of fashion.

• Big payers, including Shell and AstraZeneca, show the income power of the FTSE 100 index
• 12 out of the 20 bestselling investments on interactive investor since the start of the tax year pay a dividend of more than 3%

While sectors and investing styles might come in and out of favour, interactive investor customer data confirms that dividends never go out of fashion. Indeed, in February alone, half the top 10 most-bought investment trusts on interactive investor were AIC ‘dividend heroes.'

And looking at ISA investors specifically over the tax year to date on interactive investor, 12 of the 20 bestselling investments since the start of the 2022-23 tax year to 28 February 2023 pay a dividend yield of over 3%.

• Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

At the top of the list is Lloyds Banking Group (LSE:LLOY), which pays a dividend of 4.1%, with Legal & General Group (LSE:LGEN)in second position (7.3%) and Glencore (LSE:GLEN) holding the last of the top five spots. All dividend data is to 6 March 2023.

Seventh to 10th positions are held by BP (LSE:BP.), Rio Tinto (LSE:RIO), Vodafone Group (LSE:VOD) and Aviva (LSE:AV.), paying a dividend of 3.6%, 9.3%, 7.7% and 6.7% respectively.

Homebuilding Persimmon (LSE:PSN) (16.3%), Shell (LSE:SHEL) (3.4%) and GSK (LSE:GSK) (4.2%) take the next three positions, with Barclays (LSE:BARC)(4.2%) in 15th and City of London (LSE:CTY) (4.7%) also make the top 20 cut.

Whether you are an income or a growth investor, or a combination of the two, there is no getting away from the power of dividends. The capital return of the FTSE 100 since the start of 2013 to 28 February 2023 is 24%, rising to 81% with dividends reinvested (source: interactive investor using Morningstar).

Richard Hunter, Head of Markets, interactive investor, explains: “Company dividends have forever been a cornerstone of growth investing – powering future returns due to the wonders of compound interest. By reinvesting dividends, you allow interest to be earned on interest and, over a longer period of time, investment returns can effectively snowball. Our customers understand that all too well, as our most-bought ISA picks tax year to date demonstrate.

“Investors have had a roller-coaster ride over the past three years. But armed with the twin defences of a long-term approach and the power of compound interest, investors are well prepared to survive the occasional future onslaught which, as history tells us, will come along again.”

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Many companies were forced to cut or suspend their dividend payments following the onset of the pandemic and the ensuing periods of lockdown which put pressure on businesses. But after an extended period in the doldrums, dividends have made an almighty comeback, which is a welcome boost for retail investors who could choose to reinvest the proceeds or use them to ease the cost-of-living squeeze of finances.

“Our bestsellers' list is dominated by traditional dividend-paying stocks from the banking sector, with Lloyds Banking Group at the top of the table through to oil and gas industry, interspersed with a couple of the oldest, largest and best-loved investment trusts in the sector.”

FTSE 100 firms paying a dividend this month

City writer Graeme has written an article on the dividend bonanza totalling £8 billion is heading to shareholders in March, which you can read here.

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “Commenting, says: “UK blue-chips have a rich history of paying dividends to shareholder that can greatly enhance the total returns, if reinvested. A £1,000 investment into a fund tracking the FTSE 100 made at the start of 2013 would have grown to £1,238 rising to £1,809 with dividend reinvested by the end of February 2023 (excluding fees). In addition to robust dividends, share buybacks appears to be en vogue in this year, which boosts the value of shares by reducing the number on market.

“Despite the UK’s longstanding reputation of being a reliable and of equity income, diversification remains the name of the game when it comes to investing for dividends. Casting your investing net further afield across different regions and sectors allows you to spread the risk and reduce volatility to give the best possible chance of generating sustainable and growing income.

“While income investments typically aim to increase their dividend payouts to shareholders, or maintain them at the very least, not all achieve this goal. As such, it pays to do your homework.”

Fund picks

Dzmitry Lipski, says: “Vanguard FTSE UK Equity Incomefund provides a broader income exposure to the UK market by tracking the FTSE UK Equity Income Index of more than 100 highest dividend-paying shares, spread across various sectors bringing benefits of diversification to investors. Current yield is around 5%.

“Diverse Income Trust (LSE:DIVI) can invest in UK companies of any size but has a bias towards medium-sized and small companies. This focus differentiates the trust from the crowd, as most other UK equity income funds and investment trusts tend to have higher weightings to large companies. Fund managers Gervais Williams and Martin Turner run a diversified portfolio of around 130 holdings. AIM and FTSE Small Cap account for more than 50% of the portfolio, FTSE 250 – 14% and FTSE 100 – 20%. The managers believe that equity income (‘short duration’) portfolio of smaller, cash generative stocks should outperform growth-oriented stocks during the rising interest rates and high inflation. The trust currently yields over 4%.

“Murray International (LSE:MYI)is a globally diversified investment trust that is managed by Bruce Stout at Aberdeen Standard Investments since June 2004. The manager aims to generate long-term capital growth, while preserving capital and an above-average dividend yield from a globally diversified portfolio of equities and bonds. Unlike, its peers, the trust has almost half the portfolio invested in Asia Pacific ex-Japan, Latin America and other emerging markets, where the manager finds the best opportunities. In addition to generating long-term capital growth and income (current yield is over 4%), the trust can offer investors the benefits of capital preservation during periods of market weakness. The fund offers investors the benefits of diversification away from UK.

“Baillie Gifford Responsible Global Equity Incomefund aims to achieve sustainable income and capital growth over the longer term, by investing responsibly in global equities. The managers, James Dow and Toby Ross, exclude stocks in certain industries such as tobacco and alcohol and follow the principles of the UN Global Compact. That covers areas such as human rights, labour, the environment and anti-corruption. Among its top holdings are big names such as Procter & Gamble, Roche, Microsoft and Nestle. The fund is a compelling choice for those seeking a high and rising income from responsible equity investments. Current yield is over 2%.”

Bestselling investments on interactive investor in the 2022-23 tax year so far (to 28 February 2023)

Source: interactive investor. Dividend data correct to 6 March 2023.