Filed under: Shopping & Deals
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I've long been a fan of Individual Savings Accounts (ISAs) as tax-efficient wrappers for equity holdings. Quite simply, if you're going to buy and sell shares -- especially as a long-term investor -- then it makes sense to do so inside an ISA.
There's no further income tax to pay on dividends; no capital gains tax to pay at all; and total freedom from the burden of reporting both income and capital gains to the taxman. Want to know more? Start here.
And simply put, from both the capital gains and income perspectives, I reckon National Grid (LSE: NG) (NYSE: NGG.US) makes an ideal ISA share. Why? Let's take a look.
Trading today on a forecast yield of 5.5%, an investor making full use of his or her £11,280 annual ISA allowance for 2012-13 to buy National Grid could earn £620 in dividends next year -- without having to pay a penny more in income tax. Which is especially useful if you're a higher-rate taxpayer, of course.
Better still, National Grid is a cash cow with a long-term track record of throwing off juicy dividends -- and juicy dividend growth -- year after year. Which is why, of course, it's long been a share that's popular with income investors.
And just look at what that growth has delivered. Back in 2008 -- the start of the worst recession in 60 years, you'll remember -- National Grid investors were rewarded with an annual dividend of 29.67p per share. For 2012, the dividend was 39.28p per share.
Over the period 2008-2012, that's an annual growth rate of 7.3% -- comfortably ahead of the rate of inflation over the period, and a decent return from a dull, boring utility.
And as a utility, what's more, National Grid is also a strongly defensive share. Owning and operating networks that deliver electricity and gas across the UK, the business also has millions of customers in the northeastern Unites States, with revenues split roughly 50-50 between the UK and the United States.
So investors can be reasonably assured that the revenues, earnings and dividend growth the share has delivered in the past, will continue into the future.
Now, the principal charm of safe and boring utilities is clearly for income investors, via the sector's safe and predictable earnings.
But National Grid is a utility with a difference: here in the UK, it leaves others to sell directly to consumers, restricting its own offerings to operating the networks through which gas and electricity flow. Which in terms of regulatory supervision, gives it a little more wiggle room, and scope for capital growth.
In the last week, for instance, National Grid's shares have hit a 52-week high, on the back of its announcement that it has agreed price controls with Ofgem for the next eight years, helping to pave the way for the company to decide on its future dividend policy.
In short, while the upside in National Grid's share price is never going to be electrifying, it still makes no sense to pay capital gains tax, if sheltering the investment in an ISA can avoid that risk.
Another investor with an eye on dependable dividend-paying shares is investing legend Neil Woodford. And with £21 billion under management, coupled to a track record of comfortably outstripping the returns from the market as a whole, Mr Woodford is a voice worth listening to.
Over the past five years, for instance, his Invesco Perpetual High Income fund has returned precisely double the return from the FTSE All-Share index. And an investor putting £10,000 into his High Income fund back in 1988 would have seen it grow to £193,000 today -- that's quite some return.
Interested in discovering what other shares this investing maestro owns? Motley Fool analysts have just updated one of our most popular free reports -- 8 Shares Held By Britain's Super-Investor -- in the light of recent changes in Mr Woodford's portfolio. To download the report, simply click here. It's free, so what have you go to lose?
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Council tax bills will rise by a below-inflation average of 0.8% across England this year, the Department for Communities and Local Government announced.
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You know those savings you have in the bank.You always assumed they were yours, didn't you? Nobody could touch them without your permission. No matter how much or how little you had, your savings were sacrosanct.
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Have you been left out of pocket due to poor service or sharp practice? Do you have a money problem that won't go away?
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I'm always searching for shares that can help ordinary investors like you make money from the stock market.
So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.
Today I am looking at Barclays (LSE: BARC) (NYSE: BCS.US) to determine whether you should consider buying the shares at 290p.
I am assessing each company on several ratios:
Price/Earnings (P/E): Does the share look good value when compared against its competitors?
Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
Yield: Does the share provide a solid income for investors?
Dividend Cover: Is the dividend sustainable?
Stock | Price | 3-yr EPS growth | Projected P/E | PEG | Yield | 3-yr dividend growth | Dividend cover |
---|---|---|---|---|---|---|---|
Barclays | 290p | 40% | 7.8 | 0.7 | 3.3% | 18% | 5 |
The consensus analyst estimate for this year's earnings per share is 37p (11% growth) and dividend per share is 7.2p (11% growth).
Trading on a projected P/E of 7.8, Barclays appears cheaper than its peers in the bank sector, which are currently trading on an average P/E of around 18.4.
Barclays' P/E and double digit growth rate give a PEG ratio of around 0.7, which implies the share is under-priced for the near-term earnings growth the firm is expected to produce.
At 3.3%, Barclays' dividend income is about the same as the bank sector average. Additionally, Barclays has a three-year compounded dividend growth rate of 18%, implying the yield will grow in line with that of the company's peers.
Indeed, the dividend is slightly more than five times covered by earnings, giving Barclays plenty room for further payout growth.
Finally, Barclays' share price is currently 34% below the bank's net asset value of 438p per share at the end of 2012.
I believe Barclays is one of the most financially stable and profitable banks in the FTSE 100. During 2012, Barclays' underlying profit before tax jumped 26% from the previous year to just over £7 billion.
Having said that, like the majority of its peers in the banking sector, Barclays was forced to take an accounting charge relating to the value of its own debt, as well as increase its provision for Payment Protection Insurance claims. As a result, the company's overall 2012 profit before tax was reduced to only £250 million.
Nonetheless, Barclays appears to have a solid capital base. For example, at the end of 2012, the bank had a Tier 1 capital ratio of just under 11% and a loan-to-deposit ratio of 110%, which indicates that almost all of the bank's loans are covered by customer deposits.
However, Barclays has something that the majority of its UK peers do not and that is a large presence in Africa. In particular, Barclays is focused on becoming the leading bank on the African continent with its 'One Bank in Africa' strategy.
Indeed, Barclays currently has more than 14 million African customers across ten countries and Barclays' African division accounted for 10% of the whole group's net operating income during 2012.
So overall, based on Barclays' current discount to peers and the group's African exposure, I believe now looks to be a good time to buy Barclays at 290p.
As well as Barclays, I am also positive on the FTSE 100 share highlighted within this exclusive free report.
You see, the blue chip in question offers a 5.7% income, its shares might be worth 850p compared to about 700p now -- and it has just been declared "The Motley Fool's Top Income Stock For 2013"!
Just click here to read the report -- it's free.
In the meantime, please stay tuned for my next verdict on a FTSE 100 share.
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British MPs are struggling to make ends meet on £65,738 a year. A new Independent Parliamentary Standards Authority (IPSA) says 70% of MPs claim they deserve a +32% pay rise, potentially lifting salaries to £86,250.
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