Calling ISA investors! Is this 6% dividend yield a better buy than a Cash ISA?

Should you plump for a Cash ISA or use your money to buy this FTSE 250 dividend stock instead? Royston Wild gives the lowdown.

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This year has been another annus horribilis for Marks & Spencer (LSE: MKS), perhaps best epitomised by its humiliating relegation from the FTSE 100 in September. And it looks as if investors have plenty to fear in the new year, too. Earlier this month, the company announced a 17% slump in pre-tax profit in the six months to September.

It shouldn’t come as a shock that City analysts expect the battered retailer to record another hefty profits drop – of 23% – in the current financial year (to March 2020). A 1% drop is being touted for fiscal 2021, too, but given Marks & Sparks’ long-running failure to get demand for its fashions firing it’s another forecast I can easily see being downgraded in the months ahead.

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But would you still be better using your cash to buy shares in the bashed-up retailer than locking it up in a low-yielding Cash ISA?

Another divi cut?

It’s probably no surprise to you that broker expectations of another severe bottom-line reversal mean that the annual predictions are expected to be hacked down for a second year in a row (last year’s 13.9p per share reward is tipped to drop to 10.7p in the current period).

The good news is that this forward figure still yields 6.1%, which trounces the mid-cap forward average of around 3.3%, not to mention the sub-2% interest rates that Cash ISA savers still receive.

As I’ve explained time and again, I’m no fan of the Cash ISA. The returns that savers can expect to make from these products lag those that stock investors can expect to make – between 8% and 10% per year over the long term, studies show.

Cash ISA or M&S?

But this isn’t the worst of it: despite inflation in the UK falling to its lowest level in almost three years at 1.5% in October, the best that Cash ISA savers can hope for is to make zero return, with most actually seeing the value of their money erode (the best-paying of these instant-access products from Newbury Building Society has an interest rate of just 1.5%).

That said, I’d much rather have my money parked in one of these products than to use said funds to buy shares in Marks & Spencer. The prospect of pathetic interest rates is much more appealing than hitching your wagon to a share which is haemorrhaging in value (the retailer’s share price has fallen by around two-thirds since 2014).

And there’s the chance that M&S investors could eventually see the value of their stock reduced to zero. As the failure of Debenhams, Mothercare, BHS, and House of Fraser (to name just a few) over the past few years show – firms which have either gone bust or slipped into administration – no British shopping institution is too big to fail.

And given the number of false starts we have seen at Marks & Spencer over the past decade it’s quite possible that this former FTSE 100 stalwart could be on the road to ruin, too.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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