2 top growth and dividend stocks I’d pick for a Lifetime ISA

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You might never have heard of a Lifetime ISA, as providers are mostly pushing cash ISAs which pay piddling amounts of interest instead.

But a Lifetime ISA could be the best ISA option there is, with its bonus of up to £1,000 per year added by the government. I’ve previously explained how the Lifetime ISA works, but beware. If you take money out early, you’ll be stung with a financial penalty of more than the government’s bonus cash.

But if really want to invest for your retirement, a Lifetime ISA could be a very nice thing — though time could be running out.

Given the meagre returns from cash ISAs, I reckon shares are the only way to go. And I prefer “buy and forget” shares, with a combination of solid dividends, growth potential, and a nice margin of safety.

Out of favour

Those criteria throw up recruitment specialist SThree(LSE: STHR), whose earnings have been flat for a couple of years in the current tough economic environment. That’s led to a freeze on the dividend, which will have turned away some investors, and the share price has dipped over the past month.

But I see an overlooked bargain, as analysts are predicting earnings growth this year and next. The falling share price has pushed the predicted 2018 dividend yields up to 4.6%, with 4.8% on the cards for next year, too. And we’re looking at a strengthening of cover by earnings, reaching 2.2 times on 2019 forecasts.

I think the combination of earnings growth, assuming forecasters are correct, coupled with a well-covered dividend that looks set to start rising again in the fairly short term, gives us a reasonable safety margin here. I also see forward P/E multiples of only around 10 as indicating good value.

Big debt could ruin the picture, but a net figure of just £24m at 31 August is nothing for a company with annual turnover of around £1bn.

SThree has been buying up its own shares with surplus cash, so it clearly sees them as good value. I agree.

Overlooked growth

I also now like the look of Severfield(LSE: SFR), whose shares have been out of favour for good reason. 

The structural steel engineer went through a bad patch a few years ago and needed a big rights issue to keep itself afloat. But the turnaround looks to have been a success and earnings per share have been recovering strongly for the past few years. Dividends have risen too, and are expected to yield 4% this year, and 4.4% next — with cover reaching 2.4 times by March 2020, according to forecasts.

Those same forecasts value the shares at about 10 times earnings, which is cheaper than the FTSE 100’s long-term average of around 14. With dividend yields around the current Footsie average, that might seem fair when allowing for post-recovery sentiment that will surely still be a little uncertain.

But what sways any doubt I might have is Severfield’s cash position. Instead of the debt we might expect a company in its position to be carrying, Severfield boasted £33m in net cash at 31 March.

These two need further investigation, but I see attractive long-term prospects for both.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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