It goes against conventional thinking for most savers, but it’s a fact: investing in a cash ISA is guaranteed to erode the value of your hard-earned money, and this makes it a much more dangerous way to use your capital than investing in stocks and shares.
Right now the best-paying instant-access cash ISA is offered by Virgin Money, a product that throws up an interest rate of 1.45%. This is lower than the current rate of inflation in the UK (1.8%), meaning that if the CPI gauge remains the same over the course of a year, your savings will have lost more than a quarter of a percent of their value. We save to accumulate, not to become less wealthy, so this makes for depressing reading.
For many people Royal Mail (LSE: RMG) is considered a risk too far as the terminal decline of the letters market weighs. But given the rock-bottom interest rates offered by Britain’s banks and building societies on cash products, it’s obvious to me that the FTSE 250 firm is a far better place to stash your money today.
Short-term troubles
The country’s oldest courier has seen its share price plunge 42% over the past year amidst a series of scary trading updates. First came October’s profit warning in which it was disclosed that cost-cutting steps were falling well short of expectations. And investors fled for the exits again after a scary trading update in late January.
At that time Royal Mail declared that a deterioration in letter volumes in recent months had prompted it to predict a 7% to 8% fall in volumes for the full year, a little more than its prior estimates. But the bad news did not end here as it warned that “business uncertainty” would cause letter volumes to drop more sharply that its medium-term forecasts had suggested.
With the UK economy struggling it’s possible that Royal Mail, which has also been reeling from the impact of the European Union’s General Data Protection Regulation (or GDPR) on letter volumes, will continue to struggle and further scary updates could be in the offing.
Still a great buy
However, I remain of the belief that the huge potential of Royal Mail’s parcels division still makes the firm an attractive share to buy for long-term investors.
Despite the tough economic backcloth, both volumes and revenues at the courier’s UK packages division rose by a chunky 6% in the nine months to December 23, but this pales in comparison to the performance of its GLS pan-European division where, thanks to robust market conditions and the result of recent acquisition activity, revenues boomed 13% during April to December. I’m confident that packages traffic can continue booming at Royal Mail as the internet shopping arena still offers plenty of upside.
City analysts may expect earnings at Royal Mail to fall this year and next, but I’m convinced that it can still deliver brilliant profits growth further out. And in the meantime investors can cling to a monster 8.3% forward dividend yield for comfort.
