Top Cash ISA rates are ahead of inflation, which could make them look attractive for earning passive income.
I couldn’t knock anybody for using one right now. It’s important to try to preserve the money we have against price rises, and a Cash ISA can do that today.
It’s a good time to remind ourselves how handy it can be to build up some cash savings to deal with any emergencies that might come along. And if we can stay ahead of inflation, that’s a bonus.
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But Cash ISAs won’t stay as attractive when Bank of England rates come down.
Long-term income
The most successful ISA investors do keep a portion of their money in cash. But it’s a smaller proportion than most.
That’s not surprising, as a study by Barclays found that the UK stock market generates average annual returns of around 4.9% above inflation. That’s over a century and more, and some years do see poor results.
In the 2019-2020 year, for example, Stocks and Shares ISAs lost an average 13.3%. Cash ISAs came in well ahead that year.
To maximise our long-term passive income hopes, we surely need to take a bit more risk. But a careful approach to ISA investment can help keep that risk in check.
A single stock
I’d never put all my money in a single stock, but as an example let’s look at National Grid (LSE: NG.).
I like the forecast dividend yield, currently at 5.7%. That alone is better than even today’s top Cash ISA rates, never mind any possible share price rises.
Saying that, a dividend can never be guaranteed the way cash interest is. But over the long term, I can see the National Grid dividend coming out well on top.
Still risky
We can see from that chart that there’s been risk of share price falls. In May this year, National Grid shocked the market by rasing fresh capital, and that knocked it back.
I think National Grid could see some more volatility in the near term too. But I like the look of those dividends.
I use investment trusts as a hedge against short-term shocks like this. They spread their money across a wide range of investments, lowering the risk from any specific company or sector.
I think the Association of Investment Companies’ list of Dividend Heroes provides some good ones to consider. They adopt a number of different strategies, but they share one thing in common. They’ve all raised their dividends for at least 20 years in a row, with the leaders doing for more than 50 years.
Diversify
Even an investment trust can have a bad year, mind. So it’s all about diversification.
The more we can diversify across different businesses, the safer we should be in the long term. We should still expect down spells, like in the 2020 stock market crash. But most of that year’s losers have already recovered and gone on to gains.
So, spread my cash across dividend stocks with past records of consistent annual increases. That’s what I do with any £5,000 I have to invest.
And then I add as much extra as I can each year.
