LONDON -- What kind of shares should you be choosing for your ISA? Well, in my view the tax-efficient investment wrapper is best suited to decades-long investing in solid blue-chip shares. And for me, that means companies such as BP (BP +1.28%) (BP 0.22%).
But first, remember that this year's allowance of £11,280 must be used by April 5, and don't forget within an ISA that all share-price appreciation is tax-free and there is no additional tax to be paid on dividends -- click here for more information on ISAs.
What about the disaster?
To many people, BP means disaster: the Gulf of Mexico oil spill, to be specific. And it certainly cost the company dearly -- as of BP's full-year results published on Feb. 5, the estimated total hit was $42 billion. And with various asset sales raising the cash to cover the costs, BP lost some downstream capacity and ended up with production 6% down and full-year profits 19% down.
But events such as the Gulf spill are not things we can predict, and there is always a risk of catastrophe in any investment we make -- which is one good reason for holding a diversified ISA portfolio. And anyway, just how badly did things actually go for BP investors?
Assuming you bought the shares five years ago, you'd have paid around 530 pence each for them. Today they're worth 453 pence, so you'd be down 77 pence per share, or 14.5%. But over the period, you'd have accumulated 113 pence per share from dividends, taking your current valuation up to 566 pence per share. Over one of BP's worst periods, you'd still have made a profit of 7% -- not a great return over five years, but not a financial tragedy either.
Looking forward, not backward
Assuming there isn't another major disaster in the near future, how well are you likely to do if you pop some BP shares into your ISA now?
Current City forecasts suggest BP will enjoy a rebound in earnings per share for 2013 of about 40%, putting the shares on a forward P/E ratio of just 8. To put that into perspective, the long-term average P/E ratio of the FTSE 100 is about 14 -- BP's shares are currently valued at little over half of that!
And don't forget those dividends. Analysts are currently forecasting a dividend this year of around 23 pence per share. That's a 10% increase on the 2012 payout and represents a very nice 5.1% yield on the current share price.
An irreplaceable company
And what about the nature of the business? Well, there's much talk of ending our dependence on fossil fuels -- but for the foreseeable future, that's all just hot air. Renewable energy sources take a long time to develop, and they just do not produce the energy density of oil and gas.
So next time you hear of a new wind farm covering many hectares of countryside that can produce enough power for a small town, remember it's the stuff being pumped out by companies such as BP that is powering the important places such as London, New York, and Beijing.
Sure, nuclear power could do the job -- but it's unfashionable at the moment, to say the least, and the lead time to develop new power stations is very long.
So, we have a company whose share price is depressed, has strong forecasts, is paying nice dividends, and is in a business that will be of critical importance to the planet for decades to come. That screams buy to me, and it's why I have BP in the Fool's Beginners' Portfolio.
And I think BP should be on your list of ISA candidates!
And finally...
If you're looking for other ISA possibilities that are likely to provide shareholders with strong dividends and share-price growth for years to come, I recommend you take a look at the Fool's recently chosen "Top Income Share for 2013."
This top share is another FTSE 100 giant, and it offers a dividend yield of around 5.6% -- and there's potential for share-price appreciation, too.
You can find out the identity of this share completely free of charge, but the report will be available for a limited period only. So click here to enjoy your copy today.
