Should I Buy National Grid for My ISA?

LONDON -- I've long been a fan of Individual Savings Accounts (ISAs) as tax-efficient wrappers for equity holdings. Quite simply, if you're going to buy and sell shares -- especially as a long-term investor -- then it makes sense to do so inside an ISA.

There's no further income tax to pay on dividends; no capital gains tax to pay at all; and total freedom from the burden of reporting both income and capital gains to the taxman. Want to know more? Start here.

And simply put, from both the capital gains and income perspectives, I reckon National Grid (LSE: NG  ) (NYSE: NGG  ) makes an ideal ISA share. Why? Let's take a look.

Decent yield
Trading today on a forecast yield of 5.5%, an investor making full use of his or her £11,280 annual ISA allowance for 2012-2013 to buy National Grid could earn £620 in dividends next year -- without having to pay a penny more in income tax. Which is especially useful if you're a higher-rate taxpayer, of course.

Better still, National Grid is a cash cow with a long-term track record of throwing off juicy dividends -- and juicy dividend growth -- year after year. Which is why, of course, it's long been a share that's popular with income investors.

And just look at what that growth has delivered. Back in 2008 -- the start of the worst recession in 60 years, you'll remember -- National Grid investors were rewarded with an annual dividend of 29.67 pence per share. For 2012, the dividend was 39.28 pence per share.

Over the period 2008-2012, that's an annual growth rate of 7.3% -- comfortably ahead of the rate of inflation over the period, and a decent return from a dull, boring utility.

And as a utility, what's more, National Grid is also a strongly defensive share. Owning and operating networks that deliver electricity and gas across the U.K., the business also has millions of customers in the northeastern Unites States, with revenues split roughly 50-50 between the U.K. and the United States.

So investors can be reasonably assured that the revenues, earnings and dividend growth the share has delivered in the past, will continue into the future.

Capital upside
Now, the principal charm of safe and boring utilities is clearly for income investors, via the sector's safe and predictable earnings.

But National Grid is a utility with a difference: here in the U.K., it leaves others to sell directly to consumers, restricting its own offerings to operating the networks through which gas and electricity flow. Which in terms of regulatory supervision, gives it a little more wiggle room, and scope for capital growth.

In the last week, for instance, National Grid's shares have hit a 52-week high, on the back of its announcement that it has agreed price controls with Ofgem for the next eight years, helping to pave the way for the company to decide on its future dividend policy.

In short, while the upside in National Grid's share price is never going to be electrifying, it still makes no sense to pay capital gains tax, if sheltering the investment in an ISA can avoid that risk.

Good company
Another investor with an eye on dependable dividend-paying shares is investing legend Neil Woodford. And with £21 billion under management, coupled to a track record of comfortably outstripping the returns from the market as a whole, Woodford is a voice worth listening to.

Over the past five years, for instance, his Invesco Perpetual High Income fund has returned precisely double the return from the FTSE All-Share index. And an investor putting £10,000 into his High Income fund back in 1988 would have seen it grow to £193,000 today -- that's quite some return.

Interested in discovering what other shares this investing maestro owns? Motley Fool analysts have just updated one of our most popular free reports -- "8 Shares Held By Britain's Super‑Investor" -- in the light of recent changes in Woodford's portfolio. To download the report, simply click here. It's free, so what have you go to lose?

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