Dividend Tax: Which stocks to buy in your ISA?

Highlights

  • Investing in dividend stocks is a great way to generate a stream of stable income.
  • Dividend income may also be taxed, but there’s no tax on dividends from shares in an ISA.
  • The ISA allowance for the tax year 2021-22 is £20,000.

Dividends are the gains that are given out by companies to their shareholders, and it is a great source of regular income via stock investments. Although dividend payments may look unattractive or insubstantial in the short term, they can potentially make up a significant proportion of the total returns from your stock market investments in the long term. Dividend stocks have many advantages, which include generating a sizable passive income stream which can grow by reinvestment through the process of compounding and protecting the investors during the times of market volatility as they tend to fall less than growth stocks during these periods.

Tax on dividends

Some dividend incomes can be earned each year without paying any tax. This is the dividend income falling within your Personal Allowance. A dividend allowance is given to you every year, and tax is to be paid on any dividend income above the dividend allowance. For the tax year 6 April 2021 to 5 April 2022, the dividend allowance is set at £2,000. However, there’s no tax on dividends from shares in an ISA.

What’s an ISA?

Individual Savings Accounts or ISAs are of four types: Stocks & Shares ISAs, Cash ISAs, Innovative Finance ISAs, and Lifetime ISAs. A Stocks & Shares ISA, also known as an Investment ISA, is a tax-efficient investment account that offers a variety of options to the investors to helps them gain higher returns on their savings in a longer period of time. The range of investment options it offers include investment funds, investment trusts, individual shares, gilts and bonds. The returns on the money invested in the ISA are free from the payment of capital gains tax or income tax up to a certain fixed limit. The ISA allowance for the current tax year is £20,000. The total amount may be split across different ISAs.

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5 Dividend stocks to buy in your ISA

Evraz plc (LON: EVR)

Headquartered in London, Evraz plc is a UK-based multinational vertically integrated steel making and mining company. With a significant market capitalisation of £8,720.05 million, the company is listed on the London Stock Exchange since 2005 and is also a constituent of the FTSE 100 index. Its Earnings per share is 0.58 and its 1-year return is 82.20%. Its dividend yield in 2020 was 9.20, and its 5-year average dividend yield is 10.2%. Evraz plc’s shares were trading at GBX 597.80 at 7:43 AM on 8 September 2021.

Diversified Energy Company PLC (LON: DEC)

Headquartered in Alabama, Diversified Energy Company plc is an oil and gas production company with operations in the Appalachian Basin, US. With a market capitalisation of £934.56 million, the company is listed on the London Stock Exchange since 2017 and is also a constituent of the FTSE 250 index. Its Earnings per share is -0.03and its 1-year return is 1.48%. Its dividend yield in 2020 was 9.80, and its 5-year average dividend yield is 7.5%. Diversified Energy Company plc’s shares were trading at GBX 110.00 at 7:52 AM on 8 September 2021.

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CMC Markets Plc (LON: CMCX)

Headquartered in London, CMC Markets Plc is a UK-based financial services company that provides services like online trading in shares and spread betting etc. across the globe. With a market capitalisation of £865.51 million, the company is listed on the London Stock Exchange since 2016, and is also a constituent of the FTSE 250 index. Its earnings per share is 0.62 and its 1-year return is -11.08%. Its dividend yield in 2021 was 6.30, and its 5-year average dividend yield is 4.8%. CMC Markets plc’s shares were trading at GBX 297.00 at 8:01 AM on 8 September 2021.

BHP Group PLC (LON: BHP)

Headquartered in Melbourne, Australia, BHP Group PLC is a global resources company which produces iron ore, copper, and nickel etc. With a substantial market capitalisation of £44,596.40 million, the company is listed on the London Stock Exchange since 1997 and is also a constituent of the FTSE 100 index. Its Earnings per share is 1.57 and its 1-year return is 24.31%. Its dividend yield in 2021 was 10.30, and its 5-year average dividend yield is 4.9%. BHP Group plc’s shares were trading at GBX 2111.50 at 8:08 AM on 8 September 2021.

Ferrexpo PLC (LON: FXPO)

Headquartered in Baar, Switzerland, Ferrexpo PLC is a commodity trading and mining company. It is the world’s third largest exporter of iron ore pellets. With a market capitalisation of £2,310.94 million, the company is listed on the London Stock Exchange since 2007 and is also a constituent of the FTSE 250 index. Its Earnings per share is 0.69 and its 1-year return is 116.31%. Its dividend yield in 2020 was 3.40, and its 5-year average dividend yield is 3.3%. Ferrexpo plc’s shares were trading at GBX 392.60 at 8:14 AM on 8 September 2021.

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