I wouldn’t allow my money to languish in a Cash ISA or any cash savings account because the interest rates they pay are so low. However, I would aim to compound my money by investing in shares and share-backed investments in a Stocks and Shares ISA by constantly reinvesting the dividends.
To me, the three shares that follow could make great vehicles for a policy of compounding returns over time.
Fast-moving consumer goods
On the London stock market, I reckon Unilever (LSE: ULVR) is the king of fast-moving consumer goods companies. The firm’s powerful brands such as Dove, Hellmann’s, Knorr, Lipton, Magnum, Sunsilk, and Surf have been generating reliable cash inflow and rising dividends for many years.
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In October, with the third-quarter trading statement, chief executive Alan Jope said the firm expects full-year underlying sales growth “to be in the lower half of our multi-year 3%–5% range.” There will also likely be an improvement in the underlying operating margin that keeps the firm on track for “another year of strong free cash flow.”
That’s pretty much all we ask of Unilever – keep grinding on and slowly upwards leaving a trail of flowing cash and dividends in its wake. I’m encouraged enough by the top executive’s comments to buy the stock. With the share price close to 4,511p, the forward-looking earnings multiple for 2020 is just under 19 and the anticipated dividend yield sits a little higher than 3.4%.
Pharmaceuticals
I’d go for two of the FTSE 100’s giant pharmaceutical companies – GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN). The sector is another renowned for its cash-generating potential and steady earnings, which is great for supporting reliable dividend payments. In fact, medicines fall into the wider category of fast-moving consumer goods, so both these firms share similar qualities with the likes of Unilever.
However, big pharmaceutical companies have had their challenges in recent years because many of their best-selling products timed-out of their patent protection. The situation has been well-reported. Profits were hit because generic competition was able to flood the market thus eroding the market share GlaxoSmithKline and AstraZeneca controlled with some of their biggest and most profitable sellers.
So both firms have suffered set-backs in earnings over several years. But, of course, neither of them has taken the situation lying down. Each has been developing new products and some of those are starting to gain traction in the market.
Rebuilding earnings
It seems to me that the earnings have been stabilising and better figures could arrive in the years to come for both firms. In October’s third-quarter results statement, AstraZeneca’s chief executive, Pascal Soriot, said sales guidance has been upgraded for the second consecutive quarter, and there was “strong” performance from the firm’s new medicines.
Also in October, GlaxoSmithKline upgraded its full-year guidance for earnings per share. Chief executive Emma Walmsley said in the third-quarter results report that the firm strengthened its pipeline in the period and has “advanced” assets in the areas of respiratory, HIV, and oncology. At the time, GSK was “on track” to file three “innovative” medicines by the end of the year.
As I write, AstraZeneca has a dividend yield near 3% and GlaxoSmithKline’s is close to 4.7%. I see both stocks as attractive.
