The Motley Fool

Forget your cash ISA with these dividend darlings!

Last week’s decision to hold interest rates at 0.5% surprised some. Others warmed to the Monetary Policy Committee’s ‘wait and see’ approach, especially as the consequences of Brexit for the UK economy are still largely unknown (which hasn’t stopped a slump in the share prices of banks, airlines and UK housebuilers, of course).

There is, however, one thing we can all agree on. A drop of at least 25 basis points, if and when it does come, will just mean more misery for savers struggling to earn anything better than 1.3% on their easy-access Cash ISAs.

Don’t save, invest!

There’s another way, of course. Having repaid your debts (mortgage aside) and built up a pot of cash for emergencies, it seems only rational to seek out the best return you can get. So, I say to forget your Cash ISA and purchase solid, resilient, globally-diversified stocks with decent but not excessive yields instead.

Defensive giant BAE Systems (LSE: BA), for example, offers a forecast yield of 4%, easily covered by earnings. The prospects for the £17bn cap also look bright given the rise in terrorist activity and increased levels of defence spending by governments around the world.

Despite enjoying an exceptional rise in its share price since the EU referendum, power provider National Grid (LSE: NG) still offers a similar yield to BAE. Its consistent earnings stream has led to its reputation among investors as being one of the least volatile stocks in the FTSE 100.

Drinks-producer Diageo (LSE: DGE) is arguably another solid pick. Like National Grid, investors have flocked to the shares since the referendum due to its defensive nature. Even in tough times, people will still drink. While a yield of only 2.8% may look measly (partly due to the recent share price rise), the company’s presence in emerging markets should more than cushion any blows experienced from our EU departure.

Packaging may sound boring but businesses like Mondi (LSE: MNDI) have done incredibly well thanks to the rise 0f internet shopping. It offers a forecast yield of 3.3%. Can you see people being less inclined to buy goods online, following the referendum? Neither can I.

With its long history of double-digit dividend growth, food and support services giant Compass (LSE: CPG) is another share that should attract the attention of income investors. A yield of 2.3% may seem low but, as experienced investors know, consistent and above-average increases in the annual payout point to a company in rude health.

Higher yields, higher risk

Put together, these shares generate an average yield of 3.3%, assuming that you have equal amounts invested in each company. Some may scoff at this number, especially as a few stocks in the FTSE 100 now offer yields of over 8%. Indeed, following the referendum, the UK’s biggest housebuilders now offer what appear to be mouth-watering yields to their shareholders.

There’s a tendency for new investors to assume that bigger means better when it comes to dividend yield. This isn’t always the case. Prospective buyers must appreciate that dividend policies may be readjusted as the economic consequences of the vote become clearer, negotiations on Brexit start and earnings estimates are revised, making further drops in some share prices very possible. This is why sector diversification is so important and why all of the companies mentioned above offer this.

King for a day, Fool for a lifetime

All of the companies highlighted here are generally regarded as relatively safe and dependable, largely thanks to their consistent earnings and international exposure. I say 'relatively' because, at the end of the day, no investment can ever be completely free of risk. This is why it's so important to consider your financial goals, investing horizon and required rate of return before venturing your hard-earned cash on the stock market. 

That said, cash savers have paid and will continue to pay a heavy price for more certainty, namely their long-term financial security. Cash may be 'king' but holding too much of it at derisory levels of interest is just foolish (with a small 'f'). 

If the enduring possibility of a cut in interest rates has excited your interest in shares offering juicy dividends, you may wish to read a special FREE report written by the experts at the Motley Fool. It profiles another top income share, but one that appears to have escaped the notice of many investors.

Click here for your copy.

Paul Summers owns shares in National Grid. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.