With high interest rates, why bother with a Stocks and Shares ISA?

Christopher Ruane explains why he continues to put money into his Stocks and Shares ISA even now banks are offering high interest rates on some accounts.

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Interest rates have been rising. After years of rock-bottom rates, some savings accounts now offer meaty rates. So, why am I continuing to invest in my Stocks and Shares ISA rather putting any spare money in a bank account?

High yield

While interest rates have moved up over the past few years, there are also some attractive dividend yields on offer right now from blue-chip FTSE 100 shares.

For example, financial services company M&G yields 10.2%. By owning a range of high-yield shares like that in my Stocks and Shares ISA, I think I might be able to earn more from dividends than I could as interest.

Dividend security

There is an important difference, though.

In general, banks pay the interest they say they will. If I put money into a two-year savings bond today at a rate of 6%, I would expect that interest to be paid in the absence of exceptional circumstances. Economic uncertainty alone is not exceptional. I would expect my two years of 6% interest even if the economy tumbles.

By contrast, future dividends are never guaranteed. So if I bought a company for my Stocks and Shares ISA today that has a 6% dividend yield, that does not guarantee that I will earn 6% of my investment each year.

The dividend could be cut.

Then again, it might also be raised.

Capital gain potential

What sort of companies grow their dividends?

Basically, if a company has a strong business that is generating bigger profits over time and does not need to reinvest them, it could choose to grow its dividend. M&G did that this year, with the annual payout growing by 7%.

But dividends are only one part of what drives returns from owning shares. Another important factor is what happens to a company’s share price.  

If the price falls and I sell my shares, the value of my investment will be reduced. That is different to a bank account, where deposits are usually protected up to a certain limit by the Financial Services Compensation Scheme.

But the reverse is also true. If I put £1,000 into a bank account with a 6% interest rate, I would not expect the £1,000 of capital to grow other than to have interest payments added. But if I put money into shares and they increase in value, so too would the value of my holding.

For example, HSBC shares have grown by 20% over the past year. Imagine I had bought £1,000 worth for my Stocks and Shares ISA a year ago. That holding would now be worth £1,200. I would also be earning more than a 5% dividend yield, based on my original cost of investment.

I’m sticking to my guns

That is why, even at a time of growing interest rates, I continue to invest money in my Stocks and Shares ISA.

I think there are some great bargains in the London stock market at the moment. Some excellent companies trade at what I see as knockdown valuations.

That offers me the potential of both capital gains and dividend income. I am looking to add more such shares to my ISA.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. C Ruane has positions in M&g Plc. The Motley Fool UK has recommended HSBC Holdings and M&g Plc. 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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