Five huge dividend payers for your ISA
Filed under: Savings & ISAs
But what should you be looking out for and which companies currently fit the bill in terms of tasty dividends for income seekers?
Without doubt investors seeking income should look for companies that pay dividends well in excess of the rates paid by cash savings (say, at least 4%).
The companies should have well-covered dividends (where earnings per share comfortably exceed dividends per share).
If you know your historyA track record is always preferred – so a history of increasing dividends year after year is a good signal.
Companies selected should have growing, stable businesses, rather than be in cyclical markets (such as construction) where earnings and performance can vary hugely.
Having a strong global brand and dominant market position is another important factor.
Motley Fools picks out five companies that epitomise most of these characteristics. National Grid is currently paying 6.3% dividend, Aviva is paying 5.9%; Vodafone Group is paying 5.3%; Astra Zeneca is paying 4.9% and Dutch Shell is paying 4.8%
Each of these shares has a dividend yield of between 4.8% and 6.3%, with dividend cover ranging from 1.5 at National Grid to 2.6 times at AstraZeneca.
What's more, all of the above are established Blue Chip names with market capitalisations ranging from £12bn to £135bn.
Perhaps more importantly when viewed as a group in a portfolio of stocks, each of these big dividend payers generate income from different sectors.
Broad spreadThe power generation, insurance, telecoms, drugs and oil sectors are all represented here so there is little overlap and income is reasonably spread around.
In the 2011/12 tax year, which runs to 5 April 2012, investors can put up to £10,680 inside a stocks and shares ISA.
The income and capital gains generated by these investments are completely free of tax. Investors who receive dividends outside of an ISA receive a 'notional tax credit' worth 10% of the dividend.
In most cases, this is enough to extinguish the tax liabilities of non-taxpayers and basic-rate (20%) taxpayers. So if you received a dividend payment of, say, £100, there will be no additional tax to pay on this.
However, higher-rate (40%) taxpayers and additional-rate (50%) taxpayers must fork out additional taxes on their dividends. Higher-rate taxpayers pay 32.5% of the grossed-up dividend (the net dividend plus the 10% tax credit), equal to a quarter of the net dividend received.
Additional rate taxpayers, are liable for 42.5% of the grossed-up dividend. For these people in particular, it makes perfect sense to shelter share income from tax inside an ISA.