5% From The FTSE vs 0.62% On Cash Is A No-Brainer

Between cash and shares, there is only one winner.

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.

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.

Pound CoinsCash and stock markets are ancient rivals. For years, cash was the one they called king. It was safe, it was solid, it put a defensive moat around your money. Cash allowed you to sleep at night.

Stocks and shares were the upstart challenger. Canny investors have always known that stock markets will make them a far more princely sum in the longer run, but they were too risky for many.

But now, the battle is over. An outright winner has been declared. Cash has lost its crown.

Stocks and shares hold the field.

Savers Are On The Chopping Block

If cash is king, it is Louis XVI, beheaded in the French Revolution in 1793. Or Charles I, who lost his head in 1649.

Cash lost its throne in March 2009, when the Bank of England slashed base rates to 0.5%. There has been no sign of a reprieve since then.

Today, the average savings account pays 0.62%, according to Moneyfacts, although by shopping around, you can find easy access account paying around 1.5%.

But that is still below the rate of inflation at 1.7%, as measured by the consumer prices index.

This means that in real terms, money in the bank can only wither and die.

Blue-Chips To The Rescue

Why put up with 0.62%, when you can invest in blue-chip FTSE 100 stocks and get eight or nine times the return from the dividend payment alone?

Right now, pharmaceutical giant GlaxoSmithKline pays a dividend equivalent to a return of 4.9% a year. National Grid, Centrica, Tesco and J Sainsbury all yield just over 5%.

Energy company SSE yields 5.7%.

These aren’t high-risk stock tips, but familiar, established names. As are BP, HSBC, Imperial Tobacco and Royal Dutch Shell, all of which yield more than 4.5%.

If you prefer to spread the risk by investing in a tracker fund, the FTSE 100 currently offers an average yield of 3.66%. That is six times greater than the average savings account.

A Right Royal Return

Companies pay dividends in order to reward shareholders for holding their stock. Once the dividend has been paid, quarterly or twice-yearly, it is yours to keep, whatever happens.

Any capital growth when the company’s share price rises is paid on top of that.

Over the years, this royal combination of dividend income and share price growth puts cash to the sword.

Cash Lost Its Crown Years Ago

If you had saved £10,000 in the average high-street cash savings account 10 years ago, you would now have £11,070, according to figures from Fidelity.

You would have made just £1,070.

But if you had invested your £10,000 in the FTSE All-Share instead, you would have more than doubled your money to £22,010. 

That’s a profit of £10,940.

Yes, stock markets are more risky. But you can reduce the danger by spreading your cash between different companies, or buying an index tracker to do the job for you at minimal cost.

And you should only invest money you don’t expect to need for at least five or 10 years, to give you time to overcome any short-term correction.

Stock markets have always beaten cash in the longer run. At today’s low interest rates, there can only be one verdict.

Choosing shares over cash is a no-brainer. Stock markets rule.

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.

Harvey Jones owns shares in BP. The Motley Fool owns shares in Tesco and has recommended shares in GlaxoSmithKline.

More on Investing Articles

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Here’s how I’d aim to build a £50K SIPP into a £250K retirement fund

Our writer outlines the approach he would take to try and increase the value of his SIPP multiple times in…

Read more »

Investing Articles

9.4%+ yields! 3 proven FTSE 100 dividend payers I’d buy for my Stocks and Shares ISA

Our writer highlights a trio of FTSE 100 shares with yields close to 10%. He'd happily pop them into his…

Read more »

Mixed-race female couple enjoying themselves on a walk
Investing Articles

Are Raspberry Pi shares a once-in-a-lifetime chance to get rich?

With Raspberry Pi shares surging after a successful IPO, could this UK tech startup offer a long-term wealth creation opportunity…

Read more »

Newspaper and direction sign with investment options
Investing Articles

Huge gains and 9% yields: why now’s an amazing time to be a stock market investor

The stock market’s generating fantastic returns in 2024. Whether you're looking for gains or income, it’s a great time to…

Read more »