Believe it or not, there once was a time when a cash ISA was worth having. Today, however, the top instant access tax-free savings account on the market returns just 1.45% in interest. That’s lower than the return from a number of bog-standard, need-to-keep-my-money-somewhere current accounts.
Of course, keeping some cash to hand as a useful buffer against a period of unexpected unemployment, a broken boiler, or some other setback, is prudent. Those saving for a new car, or a deposit for a home, can also be excused from the financial naughty step. Nevertheless, all this can be achieved without a cash ISA.
For those willing to take a measured amount of risk in order to retire comfortably, there really is only one destination for their cash: the stock market. Far better, in my opinion, to put money to work in dividend-generating stocks, the income from which can then be reinvested to reap the rewards of compounding over the long term. Here are two that continue to catch my eye.
Big dividends
Since hitting 552p a pop back in May, insurance giant Aviva (LSE: AV) has seen its share price hammered, down 32%. While some of this is clearly the result of the flight from equities over the past couple of months, the company isn’t without its own challenges.
Currently leaderless following the unexpected departure of highly-regarded CEO Mark Wilson, Aviva has also had to contend with Government plans to increase regulation on equity release lifetime mortgages and the fallout from its spectacularly misjudged plan to cancel preference shares earlier in the year.
Since these look like short-term issues, I think it’s surely only a matter of time before Aviva bounces back. Meanwhile, there’s an 8.9% yield in the offing next year, based on the current share price. Importantly, this return is likely to be covered 1.8 times by profits, based on projections from analysts — the kind of security that must make owners of other firms in the top tier green with envy.
Changing hands for an exceptionally cheap six times forecast earnings for the firm’s next financial year (beginning 1st January), Aviva looks a steal right now.
Another stock that’s arguably been beaten far too harshly by the market in recent times is advertising giant WPP (LSE: WPP). Priced a little under 1,400p this time last year, the company’s value has fallen almost 40% since, on the back of concerns over competition and founder Sir Martin Sorrell leaving under a cloud.
Like Aviva, I view this current weakness as an opportunity, particularly given recent developments.
As part of its turnaround plan, WPP has revealed that it will spend £300m over the next three years on restructuring in order to boost profit margins. Having already raised £704m from 16 disposals, the firm is also gearing up to sell a majority stake of its Kantar research business.
Perhaps most crucially for income seekers, however, is news that the total dividend will be held at 60p (equating to a 7% yield). While a consistently rising payout is clearly preferable, this decision is still encouraging considering the £10bn-cap’s recent woes, and implies that management is confident on the firm’s outlook.
Available for eight times forecast earnings, WPP, like Aviva, looks overly cheap in my book. I continue to rate both shares as a great recovery plays for patient investors.
