You’ve quite possibly seen an article — first published in The Daily Telegraph — arguing that it was possible to earn 6.8% on this year’s Cash ISA allowance. It’s all down to adroit selection of accounts, plus taking advantage of special enhanced interest rate offers.
And on the face of it, the idea of a 6.8% income with no risk to your capital doesn’t look too bad.
But hang on. Not only are those returns not what they seem, it’s perfectly possible to do a lot better, by investing in the stock market.
How? Adroit selection certainly plays a part — this time, in cleverly selecting low-risk shares and investment funds. But so too does sitting back, patiently taking a long-term view, and waiting for the stock market to work its wealth-building magic. It’s worked for Warren Buffett.
Smoke and mirrors
First, though, let’s look a little more closely at those Telegraph numbers.
To start with, £160 of the £390 claimed “income” comes in marketing kickbacks from holding a single Halifax current account — including a whopping £100 as a reward just for opening it. The rest? Delivered through enhanced rates of interest on capped accounts, and heroically cycling money through bank accounts in a way that would impress even Bernie Madoff.
A sustainable source of income? Hardly.
Nor does it “scale up” for higher investment amounts: you get that same £100 for opening the account, no matter how much you hold within the three interest‑earning accounts that the article mentions. And the Nationwide and TSB accounts that the Telegraph is suggesting are capped at £2,500 and £2,000 respectively — put any more in, and you won’t get the enhanced rates of interest on offer.
So while you can certainly get 6.8% on £5,760, my estimates show that the return falls to 4.4% on an investment twice that £5,760, and to just 2.9% on three times that much.
Take a stake in solid businesses
So what is an investor to do?
Well, I’ve news for you. The Motley Fool has always believed that serious investors prepared to take a long‑term view can build a decent income — and get some handy capital growth — through building a stake in some of Britain’s biggest and best businesses.
On today’s prices, for instance, GlaxoSmithKline offers a full-year forecast yield of 5.3%. HSBC is yielding 5.8%. And Royal Dutch Shell is yielding 5.1%. Even juicier, thanks to Ed Miliband’s sabre-rattling over energy prices, electricity giant SSE — which possesses one of the FTSE’s finest dividend records — is yielding a whopping 6%.
Spread your money across such shares, in short, throw in a little by way of capital gains, and that 6.8% soon looks paltry. Better still, such dividend stalwarts are good for the long term, holding out the prospect of steadily rising dividends, plus incremental capital growth. As a strategy, it’s served Warren Buffett very well.
Leave it to the experts
Of course, not every investor feels comfortable with holding just a few shares — especially if they’re new to the stock market, and more accustomed to Cash ISAs as investment vehicles.
In which case, so-called equity income funds are an option to consider. Run by professional fund managers and investment banks, equity income funds aim to deliver a high-and-growing income by investing in a broad selection of shares, mostly within the UK, but also overseas.
Again, the yields on offer aren’t to be sniffed at. Artemis Income, for instance, yields 3.7%, and holds several of the shares listed above, plus companies such as Rio Tinto, BP, Legal & General and AstraZeneca. Threadneedle UK Equity Income holds a broadly comparable clutch of shares, and delivers 3.3%. Rathbone Income, another similar offering, yields 3.53%.
Like the idea, but don’t want to pay fund managers’ fees — not to mention platform fees payable to a fund supermarket such as Hargreaves Lansdown or AJ Bell Youinvest? In that case, a premium share-tipping service, targeted on selecting solid income picks, could be the way forward.
Cash is for the birds
Roll it all together, in short, and the Telegraph’s 6.8% doesn’t seem so attractive. For my money, investing in solid businesses through shares and funds offers a better prospect of a decent income and the prospect of capital growth.
Certainly better than that offered by cash — for as studies repeatedly show, not only do shares comfortably outperform bonds and cash over the long term, but at present the real inflation-adjusted return on cash is close to zero.
