The FTSE 100’s 3.5% Yield Thrashes Cash

Seven-Year Stretch

The UK average savings account now pays an insulting 0.63%, according to Moneyfacts.

If you shop around, the best rate you can get is 3.5%, either with Newcastle Building Society or FirstSave.

To get that, you need to lock your money away for an astonishing seven years, all the way to 2021.

Who knows what will happen to interest rates between now and then?

The nightmare for savers has gone on long enough. Why would you willingly extend it for another seven years?

It is fitting that these long-term lock-ins pay 3.5%, because you can get exactly the same amount of income today, without putting your money behind bars.

The benchmark FTSE 100 (FTSEINDICES: ^FTSE) index of leading UK shares yields 3.52% right now, to be precise. And you can get your funds back whenever you want.

Silent But Wealthy

Many investors, especially beginners, forget that stocks and shares generate income as well as growth. 

But quietly, beneath the surface, major blue-chip companies are pumping out a regular flow of dividends as a reward to anybody who holds their shares.

That money hits your bank account every three or six months, and if you invest in a stocks and shares Isa, you don’t have to pay tax on it either.

Millions of pensioners rely on these dividends to supplement their income in retirement.

If you were to buy shares in mobile phone giant Vodafone (LSE: VOD) today, you start earning income worth 5.4% of the cost of your share purchase.

Even if Vodafone’s share price never rose again, you would double your money in just over 13 years, provided you re-invested your dividends.

J Sainsbury currently yields 5.3%. National Grid and GlaxoSmithKline both yield 5%. HSBC and BP yield around 4.5%.

This is far more than you will get on cash.

Get Your Savings Back on Track

Better still, most companies aim to increase their dividend, every year. Vodafone, for example, has just hiked its dividend by 8%. 

So you don’t just get a higher income from shares, you get a rising income as well.

And that’s on top of capital growth, if the share price rises.

Naturally, shares are riskier than cash. You should never invest money that you are likely to need in a hurry, to give you time to bounce back from any market crash.

If buying individual company shares sounds too risky, you can buy a index-tracking fund that follows the fortunes of every company in the FTSE 100.

That way you can tap into today’s 3.52% yield, at minimal cost. Fidelity Worldwide, for example, has just cut its index tracking charges to 0.07% a year.

Or you could track the index using an exchange traded fund (ETF).

The iShares Core FTSE 100 Ucits ETF (LSE: CUKX) has an annual fee of just 0.1% a year, while db x-trackers FTSE 100 Ucits ETF (LSE: XDUK) charges just 0.09%. 

Finally, instead of spending those dividends, reinvest them for growth. Over time, reinvesting your dividends will account for about 40% of  the money you make from stocks and shares.

A yield of 3.5% from the FTSE 100 thrashes cash. When you include growth, there is no comparison.

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Harvey doesn't own shares in any company mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.