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Dividend Stocks for Topping Up Your ISA

Morningstar columnist Rodney Hobson reviews the GDP numbers and discusses his top dividend ideas for using up his 2012-2013 ISA entitlement

Rodney Hobson 26 October, 2012 | 8:00AM

Now there’s a turn up for the book and a very pleasant surprise it is, too. GDP growth of a whole percentage point in the third quarter raises genuine hopes that we are pulling out of recession at last and that we can weather the storm on the Continent.

It seems that the Olympic and Paralympic Games added only 0.2% to the figure, so even without this one-off boost the economy grew by 0.8%, which is as good as most economists were hoping for including the Olympics effect.

We have now more than wiped out the slippage in the first half of this year and it is clear that we will end 2012 on the plus side overall. Such are the hazards of forecasting, authorities such as the IMF and our own Office for Budget Responsibility were belatedly downgrading their UK forecasts for 2012 just as the economy was actually picking up.

Celebrations should be a little muted. After three quarters of shrinkage the economy is not yet back to where it was a year ago but it is not far short, and most of us would have settled for that scenario after initial figures suggested a disastrous first half performance.

The figures also lend weight to the argument that, with employment showing surprising strength, GDP has been underestimated. All in all, given the latest GDP figures, UK companies should fare pretty well next year and there is some leeway for the occasional mishap. I shall stay fully invested.

The importance of waiting for stock markets to settle when you are thinking of investing was brought home to me well and truly this week as I agonised over which company to choose. For once shilly shallying brought its rewards as the market fell before I could make up my mind so I held off to let the market bottom out.

I can’t for the life of me see what was so different about this week compared with last week, when markets set out on a strong upward path. No new crisis has erupted – the eurozone crisis rumbles on with nothing settled but we knew that would be the case.

The fact is that all markets can be irrational. When Margaret Thatcher said, as prime minister, that ‘You can’t buck the markets’ there was an underlying implication that the markets get things right. They don’t, at least not all the time, which is why there are so often great investment opportunities.

Regular readers will know that I look for solid companies paying decent dividends, which is how money is made on the stock market long term. According to figures compiled by business adviser and shares registrar Capita, UK quoted companies paid out £23.2 billion in dividends in the third quarter, the biggest quarterly payout ever.

We are already far enough through the year to estimate the full year outcome pretty accurately and Capita puts the projected figure at £78.6 billion, way up on last year’s record £67.8 billion. With companies conserving cash and paying down debt over the past four difficult years, next year’s tally should just top £80 billion.

I looked at several companies this week to decide where to put the last couple of thousand pounds in my 2012-2013 ISA entitlement and quite a number of possibles looked very tempting, including several that I already hold such as Sainsbury (SBRY) and Vodafone (VOD), where I am already heavily overweight, or Balfour Beatty (BBY), Glaxo (GSK) and National Grid (NG.) where I have larger than average holdings.

Other companies to catch my eye with attractive projected yields were BT (BT.A) and Centrica (CNA). However, I finally decided to take a punt on National Express (NEX) at 182p, buying in at a comparatively low level after a sharp fall in the share price following a mixed trading update. The 12-month low is 180p.

Readers should not, I repeat not, take this as a signal to do likewise. Investors should always make their own decisions based on their current needs and portfolios. As it happens, I did not have a transport company in my holdings and I feel this modest purchase addresses an imbalance.

National Express has a prospective yield of more than 5% but is not without risk. In particular, it will bear the brunt of the government's decision to withdraw half price coach travel for senior citizens. I am hoping that most people who are affected will grudgingly stump up, especially as coach travel is so much cheaper than rail.

The coach company has operations in Spain, which are under pressure in the austerity regime, and in the US, where UK travel companies have had a patchy ride over the years. I am hoping, though, that the downside is fully reflected in the share price.

Weekly Market Performance (October 22-26)
FTSE 100: -1.52%
FTSE 250: -1.23%
FTSE All Share: -1.46%
FTSE SmallCap: -0.56%
FTSE AIM 100: -2.82%
FTSE Fledgling: -0.62%

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Rodney Hobson is a long-term investor commenting on his own ideas and portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, most recently The Dividend Investor.

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