With cash ISA interest rates so low, I reckon a better way to compound money for retirement is to invest in dividend-paying FTSE 100 shares.
By reinvesting dividend income back into shares, you can achieve compounding returns in a similar way that Cash ISA interest compounds in a bank account. But the dividend yields are bigger than Cash ISA interest rates in many cases, which means your invested money could grow faster over time.
On top of that, shares have the potential to go up, which means your capital could grow, too. But there is some risk, of course, because shares can fall in value as well. That’s why it’s important to choose shares carefully, and I like these two.
Pharmaceuticals
Big firms operating in the pharmaceutical industry tend to enjoy stable cash inflows because of the constant demand for medicines, whatever the general economic weather, and that’s good for dividend payments to shareholders. But GlaxoSmithKline (LSE: GSK) has endured a tough few years because of a storm of patents expiring.
Without patents protecting its big-selling drugs and treatments, generic competition has swamped the market for some of the firm’s brands. That competition has put pressure on selling prices and eroded GlaxoSmithKline’s market share in many areas. The outcome is that profits have been under pressure.
But the company has managed to hold its dividend flat throughout this troubled period, and now we are seeing the first green shoots of new growth in profits, driven by new releases from the research and development pipeline. Yet at the recent share price close to 1,717p, the dividend yield is around 4.7%. I reckon that’s attractive.
Tobacco
Those firms supplying tobacco and other products for smokers often enjoy stable cash flows. Cyclical variations in demand for the products are rare, although there is a long-term trend of declining cigarette volumes.
Nevertheless, British American Tobacco (LSE: BATS) has a good record of cash-generation and dividend payments over the past few years. But right now, the shares appear to be out of favour with investors because of fears about potential new regulation in the industry.
But in August’s half-year report, the firm said the US Food and Drug Administration (FDA) is addressing concerns relating to the use of vapour products by young people and with regard to the use of menthol in cigarettes, as well as nicotine reduction. In all cases, BATS appears to see itself as well-positioned to manage any regulatory changes that develop.
Meanwhile, with the share price near 1,717p, the forward-looking dividend yield for 2019 is around 7.5%, reflecting investor concerns. I think that yield is attractive. Warren Buffett once said, “you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.” I think that quote applies in this case, and overall, I reckon both these shares are more attractive than a Cash ISA right now.
