The top Cash ISA rate on the market at the moment is just 0.6% for an easy access product. I can get a little more if I’m willing to lock my money up, although not by much. The best five-year fixed rate product on the market at the moment offers an interest rate of 1.15%.
In comparison, I can achieve a significantly higher rate of return by investing in UK shares. Indeed, a handful of blue-chip stocks currently support dividend yields of more than 5%.
Forget the Cash ISA
Interest rates available on Cash ISA products today are extremely disappointing. There’s also another drawback — inflation. Over the past few decades, the rate of inflation has averaged around 3% across the UK. It has fallen over the past 12 months, but many analysts expect this trend to reverse as the pandemic recedes.
If the rate of inflation returns to 3%, an investor who has locked up their money for five years at 1.15% will actually see a negative rate of return after inflation of -1.85% per annum. As such, I’m extremely wary of Cash ISAs at present. I’d much rather buy UK shares instead.
Not only do many UK shares offer dividend yields far above the best interest rates available on Cash ISA products, but they also offer the potential for capital growth. Company earnings tend to grow in line with inflation over the long term. That can translate into share price growth. Therefore, owning UK shares is a great way to protect my hard-earned cash from the wealth-destroying effects of inflation.
A better buy
A couple of UK shares stand out to me as being a better buy than any Cash ISA product right now.
Some examples are the UK supermarket retailer Tesco and telecommunications giant Vodafone. At the time of writing, these two blue-chips support dividend yields of 6.6% and 3.8% respectively. When held in a portfolio together, they could provide an average yield of 5.2% per annum.
Some other FTSE 100 options include defence contractor BAE Systems. This company currently supports a dividend yield of 5%, and it has an impressive track record of above-inflation dividend growth. Healthcare and pharmaceutical group GlaxoSmithKline also supports a near 6% dividend yield. This stock should benefit from the general rising demand for healthcare and health products in the years ahead.
In the financial sector, shares in insurance giants Aviva and Legal & General support dividend yields of more than 7%. There has been some speculation that the former may reduce its dividend as part of its restructuring plan. However, even if the payout is cut by 50%, the stock would still offer a yield three times higher than the interest rate on the best five-year Cash ISA product on the market today.
That’s why I’m confident these FTSE 100 dividend stocks will produce a better return than any Cash ISA in the long term.
