Cash ISAs are often the first place new investors look when they are uncertain about the future of the stock market. However in recent weeks, the interest rates available on these products have plunged. Therefore, buying FTSE 100 stocks such as Tesco (LSE: TSCO) may be a better alternative for investors over the long term.
Tesco shares offer inflation protection
Cash ISAs might seem to offer less risk than FTSE 100 shares, but owning cash has one main drawback. It provides almost no protection against inflation.
For example, over the past decade, the Bank of England has kept interest rates below 1%. Inflation has averaged more than 2% during this period.
That suggests that the purchasing power of cash in savings accounts has declined steadily since 2008. In comparison, FTSE 100 shares have returned 6% per annum for the past decade.
Unfortunately, Tesco shares have underperformed in this period. The stock has returned -2.7% per annum for the past 10 years. However, that may be about to change.
The past decade includes one of the most turbulent periods in the company’s history, the 2014 accounting scandal. Tesco has now put this crisis behind it and is pushing ahead with new growth initiatives.
These initiatives should help power the company’s bottom line higher over the long term. What’s more, Tesco should be able to increase the prices in its stores in line with inflation. This implies that the group’s earnings should grow in line with or slightly higher than inflation over the long run, which should translate into a positive performance for Tesco shares.
Defensive qualities
The group’s defensive nature should also help Tesco shares outperform going forward. As many companies have struggled in the coronavirus crisis, Tesco has prospered.
Sales have boomed, and while the company has had to invest money to cope with demand, initial projections suggest that the increase in sales will offset these higher costs for the year.
Government efforts to stimulate the economy through the coronavirus crisis, such as the suspension of business rates and other tax incentives, will also help the group’s bottom line this year, although these tailwinds are only expected to be temporary.
Nevertheless, Tesco is so confident in its outlook that it recently confirmed that it would be maintaining its dividend this year. That’s a luxury few other companies can afford right now.
At the time of writing, Tesco shares support a dividend yield of 4.1%. The business has a long track record of above-inflation dividend increases.
Furthermore, with the FTSE 100 stock trading 26% lower than it was at the start of the year, it appears to offer a wide margin of safety.
As such, while Tesco shares might not deliver tremendous capital gains in the short term, they appear to have the capacity to deliver above-inflation returns, with both income and capital growth over the coming years.
