Should you go for growth or income when planning your ISA? While there's plenty of room for the occasional higher-risk growth candidate from time to time, if that's what you fancy, I reckon the bedrock of a long-term ISA should be composed of dividend-paying blue-chip shares from the FTSE 100 -- with at least one utility company in the mix.
The companies that provide our gas, water and electricity enjoy a very predictable business. Demand doesn't vary too greatly, and by taking on long-term energy contracts they can avoid surprises on the cost front, too. And that makes steady predicable dividends that much easier.
Look at National Grid(LSE: NG). It's been lifting its annual dividend year after year, and offered shareholders a yield of 5% last year. Earnings are expected to only grow slowly over the next few years, but we still have steady dividend increases on the cards that would yield 4.6% for the year to March 2016, with forecasts lifting that to 4.8% by 2018 -- the yield has dropped a little because the share price has risen 12% over the past 12 months, to 963p.
Those yields would be covered around 1.4 times by earnings, which is pretty strong for the utilities sector, and National Grid says it should be able to boost its annual cash payment at least in line with RPI inflation for the foreseeable future.
Over at electricity supplier SSE(LSE: SSE), we're looking at even better dividends, with a yield of 5.9% paid in 2015 and with 6.3% forecast for this year on shares priced at 1,457p. That would be a little less well covered at 1.25 times, but it's still reasonable for a utility firm. The share price hasn't done much over the past five years, putting on just 17%, but that's still ahead of the FTSE and those 6% dividends are around twice the long-term FTSE average.
SSE has the same dividend policy as National Grid, too, and at interim time told us it expects to increase its 2015/16 full-year dividend at least in line with RPI inflation -- and it is targeting the same thereafter.
Water firm United Utilities(LSE: UU) actually has a couple of years of falling earnings forecast -- 11% this year and 2% next. But analysts are expecting an 8% uptick for the year to March 2018, and in the long term the firm's earnings should be solid. Perhaps unsurprisingly, United Utilities also has the same target of at least matching RPI inflation with its dividends, and in its first-half update said it expects to manage it at least until 2020.
With the shares at 894p, that would mean yields of 4.2% this year, rising to 4.4% by 2018, with cover of around 1.2 times. It's looking like the weakest dividend of the three, but by way of compensation the share price has put on 57% over the past five years, easily beating the FTSE's meagre 6%.
Long-term wealth generation
You're not going to get the white knuckle ride that turns a lot of potential investors away from shares (and, on the other hand, excites a good few too), but safe investments like these three should help your ISA perform very well over the decades -- and putting the cash into shares will almost certainly beat the pants off any cash ISA.
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.