Don’t let your money die a slow death in cash

Leaving large sums of money in cash for long periods no longer makes sense, as you are effectively sentencing it to a slow and painful death.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Public domain.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Most investors will be familiar with the phrase “cash is king”, but these days it seems to belong to another time and place.

Cash was dethroned the moment global savings rates were squeezed to near zero in the wake of financial crisis.

Too many savers loyally cling on in hope of a recovery, even as interest rates turn negative across much of Europe and Japan.

The US Federal Reserve is currently the only central bank that is considering hiking rates, but it has failed to raise rates once so far in 2016.

With some accounts paying as little as 0.01%, even the most loyal saver must accept that the days when cash was king are now history.

Slow death

Of course, everybody should keep some money in an instant access savings account in case of emergencies.

If you are building a pot of money for a short-term goal such as a property deposit, cash is a handy safe haven. The elderly will be understandably reluctant to take risks with their money, and rightly leave it in the bank.

But for everybody else, leaving large sums of money in cash for long periods no longer makes sense, as its value will steadily be eroded by inflation. This means you are sentencing it to a slow and painful death.

Dividend heroes

If you have long-term savings, you simply can no longer afford to leave them in cash and must explore the alternatives.

Why put up with, say, 0.5% interest when you can generate 10 times as much income by investing in dividend-paying stocks?

A host of top global companies across the UK, US, Europe and now emerging markets now offer generous yields of between 3% and 7%.

It is a relatively straightforward task to create a balanced portfolio of stocks offering a annual income of around 5% a year.

Dividend stocks are the unsung heroes in the global hunt for yield. It is time we started singing their praises more loudly!

Income for growth

Another attraction is that most companies aim to progressively increase their dividends over time, which means you are locking into a potentially rising income stream.

Too many investors underestimate the value of this income stream. Over the long term, dividends are responsible for around two thirds of the money you will ever make from stocks and shares, provided you reinvest your income back into the company’s stock.

When you finally stop working you can take the dividends as income to fund your retirement, and if your portfolio is large enough leave the capital invested for further growth.

Risk and royal returns

Naturally, stocks and shares are riskier than cash. You should never invest money you expect to need in the next five years.

Dividends aren’t guaranteed either, and there is always the danger they will be cut if company performance slips.

You can largely avoid this fate by researching your companies carefully before parting with your money, and be particularly wary of those offering large yields of 6% or 7%, which may prove hard to sustain.

Stock markets may seem volatile in in the short term, but over the longer run they beat all the alternatives and destroy savings accounts.

Cash is dead — long live the dividend!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »