Why I’d forget savings accounts and buy dividend stocks today!

Although I hold ‘rainy day’ money in a cash savings account, I prefer buying shares to try to grow my wealth for the long term.

Hand holding pound notes

Image source: Getty Images.

Soaring inflation means it’s more important than usual for me to think about what to do with my extra cash. Leaving it in a bog-standard savings account could be bad for my wealth, as latest research from Janus Henderson shows. It’s why I myself am choosing to buy UK dividend stocks instead.

According to Janus Henderson UK savers deposited an extra £106bn in cash accounts in 2021. This took the total to an all-time high of £1.9trn.

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However, the impact of high inflation “destroyed” a record £98.2bn worth of total savings, it says. That amounts to £3,474 per household, to put this in perspective.

Inflation destroys savings interest

Janus Henderson expects the problem to get worse in 2022, too. As inflation gains momentum and cash deposits rise, Britons will see £107bn wiped off the value of their savings, it says.

Consumer price inflation (CPI) continues to surge and the latest reading for February showed prices rise at their fastest rate for 30 years, at 6.2%. Consensus amongst economists suggests that CPI is expected to head much higher, too.

Shares vs savings accounts

Of course, cash savings are still safer than buying shares. And pleasingly the rates on savings accounts are rising again as the Bank of England raises its benchmark rate. But it seems that the eroding effect of inflation on the value of savers’ income is set to persist.

This is why I believe that buying dividend stocks is a much better way to use my spare cash. I have a Cash ISA to hold some of my money. But I use it to hold ‘rainy day’ money or to temporarily store cash before I make a big purchase.

Buying dividend stocks gives me a chance to reduce the damage caused by rampant inflation. For example right now the average FTSE 100 forward yield sits at 3.5%. That’s around 2.8% better than the interest rate on the best-paying no notice Cash ISA currently on the market, according to Moneysupermarket.

Inflation-beating UK dividend stocks

That being said, there are also many dividend stocks on the FTSE 100 alone that provide yields above the current rate of inflation. This gives me a chance to actually make a positive return on my cash in real terms. These include:

  • Aviva (6.4% dividend yield)
  • Barratt Developments (7.5% dividend yield)
  • Imperial Brands (8.7% dividend yield)
  • Legal & General Group (7.4% dividend yield)

The drawback with investing in shares is that the prices of these assets can go up and down. £500 I invest today in UK stocks could eventually be worth a lot less if share markets crash. Conversely, when I park £500 in a cash account, I know it will still be sitting there, whatever happens elsewhere.

That said, in my opinion the excellent returns that dividend stocks have provided for decades still make them a better choice for me than savings accounts.

Indeed, Janus Henderson says that UK share investors have grown the value of their money by 70% over the past decade, even taking into account the impact of inflation.

I’ve been investing in dividend stocks for many years now. And I plan to continue doing so long into the future.

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Royston Wild owns Barratt Developments. The Motley Fool UK has recommended Imperial Brands and Moneysupermarket.com. 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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