For years, buying FTSE 100 shares felt like a no-brainer to me. Why would I leave money in a savings account getting almost no interest, when I could buy top blue-chip companies yielding 5% or 6% a year, with potential capital growth on top?
The average long-term return on the FTSE 100 over the last 20 years is 6.89% a year, which would have turned a £10,000 investment into £32,909. By contrast, a cash deposit account paying 1.5% would have increased the same sum to just £13,469.
Cash is back, but not king
Yet things have changed. United Trust Bank will now pay me a fixed rate of 5.75% for 12 months, while if I’m willing (and able) to lock my money away for longer, Recognise Bank will pay me 5.85% a year for three years.
These returns are mind-boggling compared to what savers got just 18 months ago, yet I’m still not tempted. Am I stuck in my ways or is this a rational move?
While these savings rates are a massive step up, they have disadvantages too. First, they’re well below May’s inflation rate of 8.7%, which means the value of my money is still falling in real terms.
Second, I’ll only get those returns for a set period. At some point, both inflation and interest rates are expected to fall. And when my savings bonds mature, I’ll probably get a lot less interest from my next account.
The main reason I’m shunning cash is that I reckon there’s now a terrific long-term opportunity to load up on FTSE 100 shares. Buying today takes a bit of courage given recent troubles, but I always like buying shares when they are cheap.
A really good example is Lloyds Banking Group. It’s trading at just 5.4 times earnings, a fraction of the 15 times that’s traditionally seen as fair value. It’s forecast to yield income of 6.6% this year, while in 2024, that could hit 7.24%, smashing savings rates.
Stocks work best for the longer run
The big difference with shares is that my capital is at risk, and those dividends are never guaranteed. A house price crash could hit Lloyds’ profits, but I’m not planning to hold the stock for one, three, or even five years, but much, much longer than that. That gives it plenty of time to overcome today’s short-term market volatility.
We see a similar story with another favourite income stock that I’m keen to buy more of, wealth manager M&G. It’s been hit hard by recent volatility, as fund managers usually are. But it’s forecast to yield a thunderous 10.4% in 2023 and 10.5% in 2024. The stock’s also cheap, trading at just 11 times earnings.
They are another dozen FTSE 100 dividend stocks I’d buy today instead of putting money into cash. The next few months, or even years, may be bumpy for shares as today’s crisis plays out. And my portfolio could fall in the short term, which won’t happen with cash in the bank.
But I’m in this for the long haul and expect my portfolio of FTSE 100 shares to make me much richer in the longer run than cash. Which is why I’m buying more of them today.
