This top savings account pays 6.15% a year! But I’d rather buy Aviva shares

Aviva shares have had a disappointing year, but they’ve still delivered a total return of 10%, something no bank deposit can match.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Chalkboard representation of risk versus reward on a pair of scales

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Aviva (LSE: AV) shares offer a terrific yield of 7.7% a year, but why bother when I could get almost as much on cash today?

Challenger bank FirstSave’s two-year fixed-rate bond is currently topping the best-buy savings rate tables by paying 6.15% a year. That’s a huge improvement on a couple of years ago, when savers were lucky to get 1.5%. Cash now offers more competition than it did. 

In contrast to buying a FTSE 100 stock like Aviva, my capital is safe in a savings account. In the highly unlikely event that FirstSave goes kaput, the first £85,000 would protected under the Financial Services Compensation Scheme.

Cash is offering competition

There’s no such guarantee when buying shares. If I had invested £5,000 in Aviva six months ago, I’d have just £4,569 today (ignoring any dividends I received). That’s a paper loss of £431, with the stock falling 5.62% in that time. Anybody who buys direct equities instead of leaving their money in the bank has to be prepared for this type of stock market volatility.

Measured over 12 months, the Aviva share price is up just 2.34%. That’s disappointing, but combined with the dividend, investors still got a total return off around 10%. No cash savings account can match that.

Created with Highcharts 11.4.3Aviva Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Aviva shares have had an underwhelming year but still delivered an inflation-beating return. Again, that’s something no best-buy savings account has managed. Money left in cash is still being eroded in real terms, despite today’s higher rates. Which is a strong argument in favour of buying shares instead.

Here’s another. Aviva shares look cheap. They currently trade at just 7.66 times earnings, well below the 15 times considered fair value. This offers potential upside when stock markets recover, as may be happening today.

There are no guarantees, as share price performance is totally unpredictable. In 2022, Aviva posted a better-than-expected 35% rise in annual operating profit to £2.2bn and declared a total dividend per share of 31p, up from 16.76p in 2022. It even announced a £300m share buyback, as life and general policy sales rose. Yet the stock has gone nowhere.

I much prefer shares

Instead, investors focused on the negatives, such as the surging cost of general insurance claims as motor repair costs accelerated and extreme weather damaged homes.

Yet, I’d still much rather buy Aviva shares than stick to the safety of cash. The true rewards of investing come over the longer run. While savings accounts pay attractive levels of interest today, that’s unlikely to last as inflation starts to fall.

When that two-year fixed-rate bond expires, prevailing savings rates are likely to be much lower. By contrast, Aviva dividends will be climbing. The stock is forecast to yield 8.33% this year and a thunderous 9.11% in 2024. I don’t think I’ll ever generate that kind of return on cash.

Dividends are never guaranteed, but Aviva’s looks a lot safer than most. When the outlook brightens, I should get capital growth on top. I would never buy any share with less than a five-to-10-year view, and over such a lengthy period, I would expect Aviva shares to smash the returns on cash. I’ll buy them next week.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

£20K invested in Tesla stock last April is now worth…

Despite all the bad headlines lately, Tesla stock has put in a storming performance over a 12-month timeframe. Is this…

Read more »

Investing Articles

If a 40 year old invests £600 a month in a SIPP, here’s what they could have by retirement

With no retirement savings at 40, an investor could put £600 a month into a SIPP and grow its value…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Why hasn’t its 9.9% yield boosted the Phoenix share price?

Phoenix Group has a dividend close to double digits, but saw a weak share price performance in recent years. Christopher…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

With average 10% yields, these mid-cap FTSE shares could supercharge a passive income portfolio

Some of the best passive income gems can be found on the UK's smaller indexes like the FTSE 250 and…

Read more »

A coin being dropped into a piggy bank
Investing Articles

As the Barclays share price tanks 19% in 2 days, is this a great buying opportunity?

As a trade war sends the Barclays share price into a tailspin, Andrew Mackie steps back to look at the…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Is Fundsmith Equity still a good choice for a Stocks and Shares ISA in 2025?

Many Britons hold the Fundsmith Equity fund in their Stocks and Shares ISAs. Is this still a good move? Edward…

Read more »

Investing Articles

Nvidia stock is down 24% this year. Time to buy the dip?

Christopher Ruane has been eyeing Nvidia stock as a potential addition to his portfolio for a while. Is a recent…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Down 25% since January, this resilient dividend stock’s catching my eye

Maintaining the UK’s rail, water, and energy infrastructure isn’t the most exciting business. But it has made this a solid…

Read more »