Fed up with low interest rates? Gear your investment ISA towards income

As interest rates remain low and investors look for better returns on their cash Graham Spooner, investment research analyst at The Share Centre, picks three income stocks for your ISA.

"Fed up with the continuing low interest rates and aware that current rates on savings accounts and maturing bonds will not reflect those received in the past, investing for income is becoming an increasing trend for savers who are looking for an alternative income stream.

"Research carried out on behalf of The Share Centre showed that 9% of people who are not currently investing or saving said it was because they were put off by low interest rates.

"However, historically equities have outperformed cash and there is an increased temptation to look towards the stock market. Investors willing to increase their risk levels slightly may see better returns on their cash by buying shares in high yielding companies in a tax-efficient Stock and Shares ISA. The research suggested over half (52%) of ISA investors are willing to accept some risk in their investments.

"Income is a key reason why people are investing in the stock market. 23% of people who have invested in an ISA in the last two years said their aim is to increase the returns on the cash they hold. The impact of continuing economic pressures on consumer spending is also evident as 22% of ISA investors said they are investing to supplement their disposable income. 

"18% of ISA investors said that high yields are the main influence for choosing their investments. Higher yielding companies perceived to be lower risk are increasingly attractive to investors in current market conditions. Consequently, sectors seen to have defensive characteristics, such as utilities and tobacco, outperformed in 2011.

GlaxoSmithKline

"GlaxoSmithKline is attractive for income seeking investors with a prospective yield around 5% and has the potential for longer term growth.

"The company outperformed the market last year after a long period of average performance and although generic competition remains a concern, the company thinks the problem has now receded. It has a good potential pipeline for new drugs and analysts are getting excited about a future cancer vaccine and a heart disease drug.  

"GlaxoSmithKline is slowly moving into emerging markets and pressure on drug prices, especially in Europe, makes moving into other regions sensible.

"The pharmaceutical company is a lower risk investment and offers investors stability in a portfolio."

Vodafone

"Mobile phone usage and data have proved fairly defensive in recent years. The thirst for data services is being driven by the smart phone and mobile tablets, such as the iPad. It seems mobile phones have become embedded in our everyday lives and people prefer to reduce budgets elsewhere than surrender their personal phone.

"Vodafone has been successfully restructuring, selling assets to pay off debt and continue its share buy back programme. The company is now perceived as having defensive qualities, which saw the share price hold out better than others in the market turmoil in 2011.

"Vodafone is attractive for investors wanting a business exhibiting defensive qualities, strong levels of free cash flow, a debt reduction plan and concentration on its core growth opportunities while looking for the next growth prospect. It offers investors a stable and increasingly attractive yield, which currently stands at 4.9%. Investors have also recently received a special dividend from American company Verizon Wireless, as Vodafone has a 45% holding in the company. Vodafone's growth opportunities are also attractive for long term investors."

Centrica

"Centrica had a poor year last year and was one of the few underperforming utilities companies, which was reflected in its uninspiring final results announced in February. However, this was expected as warmer weather, increased taxes and higher wholesale cost of gas hit margins and the UK consumer has cut back on consumption. As a result the group has been cutting costs with the aim of delivering £500m in savings.

"The share price fell by around 15% last year, pushing the prospective yield to over 5% for the current year. Although we believe any increase in the share price could be limited, this stock may be more attractive at current levels for income seeking investors looking for a utility company. The full year dividend for 2011 was increased by 8% to 15.4p."