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.
