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Killik's Top ISA Picks for Income

Emma Wall

Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall, and I'm joined today by Killik & Co.'s, Rachel Winter to give her three ISA stock picks.

Hi, Rachel.

Rachel Winter: Good morning, Emma.

Wall: So, what's the first ISA pick today?

Winter: Well, because its ISAs, I'm looking at looking at stocks where you can save the most tax by having them in an ISA. This year you can have £5,000 worth of dividend income outside of your ISA, without paying tax, next year that's falling to £2,000, so I think where possible, people should try and get the high yielding stocks within their ISAs.

So, the first one I'm looking at is Royal Dutch Shell (RDSB). Known for being an oil company, it has a very high dividend yield of 5.88%, but actually about one-third of Shell's profits comes from gas. And this on my radar at the moment because we were hit quite hard here in the UK last week by the beast from the east and that really highlighted to me, how relevant a commodity gas still is.

So, 84% of UK homes use gas central heating, so a very high level and we did have a gas shortage here this week. And actually, looking at Shell's volume results for 2017, there is sort of 47% increase in profits from gas. So, very relevant commodity at the moment and we like Shell because it does have such a high exposure to gas.

Wall: And I think people were guilty perhaps of lumping all those energy stocks in together. But actually, as you say, those that are pure role plays are very different in terms of their analysis and those do have diversified portfolio.

Winter: Exactly. Shell is a very, very diverse company. The oil is doing well at the moment. The oil price is currently $65 a barrel, Shell's costs are well below that at the moment. They have managed to cut their operating costs by about 20% over the last three years, so that's definitely a positive. But we like the company because its so diverse. Its got oil. It's got gas and it's got renewable energy. So, definitely an investment worth considering for your ISA.

Wall: And what's the second stock pick today?

Winter: Second one is Marston's (MARS), which is a UK pub company, probably best known for being a brewery. So, it is the number one in UK premium cask ale, but most of those profits actually come from managing pubs and taverns. And its done very well because its switched its focus away from pubs at the low end of the value train towards more premium pubs, so those are doing very well. That's enabled Marston's to get some price increases through, so that's done very well. And also, at the moment the stock has a 7.2% dividend yield, so very, very high in comparison to the average stock on the markets.

Wall: Which can often be a trigger to say that actually something might happen with the share price. Sometimes that can actually be a warning, but here you think actually everything looks good fundamentally?

Winter: We do, yeah. So, the reason it’s so high is that the share price has come down over the last few months or even years. But actually, we think it looks very attractively valued. A lot of competitors in the pub sector have had profit warnings recently, that's mainly because they've been discounting too much that's hit their profits. Marston's hasn't been doing that, so its in a much better place, but the share price has come down anyway, so we think it does look a little bit oversold at the moment.

Wall: And what's the third and final pick?

Winter: Third one is Deutsche Telekom (DTE), so this is a German company. It’s the largest telecom's company in Germany. About 50% of revenues come from Germany and then about a quarter from the US. We like it because the use of the internet and data usage is massively increasing year-on-year, particularly as we use mobile phones more and as we start streaming more content from platforms like Netflix.

We like Deutsche Telekom because its invested quite heavily in faster internet and fibre optics like BT here in the UK. So, customers like it very much and it is seeing an increase in market share. And also, its got a very nice dividend of 4.8%, so another good one to hold in the ISA.

Wall: And that is a market in the Europe, which has been consolidating over the last, well I suppose, decade. Is Deutsche Telekom significant enough a player in order not to be affected by that. Have they sort of carved out their own market share?

Winter: They have. It's probably a beneficiary of that, so as I said, it’s the largest company in Germany now. Its increasing market share and also its got a controlling stake in T-Mobile, which is one of the biggest mobile networks in the US. So, lots of opportunities for growth there for Deutsche Telekom.

Wall: Rachel, thank you very much.

Winter: You're welcome.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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.