Forget a cash ISA! I’d put this 5% dividend yield in my Stocks & Shares ISA

Why I’m optimistic about this firm’s future prospects and its potential to recover and grow.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Cash ISAs pay terrible rates of interest, and it’s unlikely that you will be able to compound your money enough to keep up with inflation if you use them for your savings.

Instead, I’d buy shares for my Stocks & Shares ISA because the dividends they pay can be reinvested and compounded in a similar way to how interest builds up in an ISA cash savings account.

Growing from an inflection point

I like the look of FTSE 250 manufacturing company Essentra (LSE: ESNT), which has a dividend yield running close to 5%. The share price has dropped by around 60% since its peak around four years ago but has been clawing its way back up through most of 2019, so far. But the weakness in the price is part of the reason for the high dividend yield, so I see it as an opportunity for investors.

There have been operational problems causing profits to dip. But in today’s half-year results report, chief executive Paul Forman said that in 2018, Essentra reached an “inflection point” and the firm is now set for sustainable growth in revenue and profits. On that theme, I find today’s figures to be encouraging.

Like-for-like revenue for the first half of the year to 30 June moved 1.3% higher than the equivalent period last year, and adjusted basic earnings per share at constant currency rates lifted by 7.5%. The directors maintained the interim dividend, which is reassuring given all the ongoing changes in the business.

Streamlining for growth

Indeed, the firm has been busy nipping and tucking operations, involving selling off underperforming divisions and acquiring new bolt-on businesses. But Essentra is no stranger to building growth via the acquisition route and has a long history of taking over other firms and businesses. From its roots as a manufacturer of filters for cigarettes, which it still produces, Essentra now claims to be a “leading global” provider of “essential” components and solutions with the three global divisions of Components, Packaging and Filters.

Today the firm reported “positive” momentum maintained in its Packaging division, which “returned to growth” in the last half of 2018. Paul Foreman explained in today’s report that the firm is in the process of “simplifying” operations. So far this year the subdivisions of Pipe protection, Extrusion, Speciality Tapes and Card Solutions have all been sold off. The Kilmarnock and Largo consumer packaging sites were also closed down at the end of last year. And on top of that, Essentra made a couple of acquisitions in the first six months of 2019.

I reckon simplification and increased focus is almost always a good thing in business, which makes me optimistic about the firm’s future prospects and its potential to recover and grow. At the recent share price of 408p, we can pick up a few of the shares on a forward-looking earnings multiple of just over 15 for 2020, which I’m inclined to do. Meanwhile, the anticipated dividend yield is around 5%, which looks attractive to me.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Essentra. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Fancy a 13.9% dividend yield? Consider these dirt-cheap investment trusts!

These investment trusts are trading at whopping discounts to their net asset values (NAVs). Here's why they could prove to…

Read more »

Investing Articles

If the market shut down for 10 years, I’d be happy to hold these 2 FTSE 100 shares

Our writer reveals a pair of FTSE 100 shares that he reckons are well set up to deliver strong returns…

Read more »

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »