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Forget the top cash ISA rate. I’d pick up 6% from FTSE 100 dividend stocks

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Many UK savers are pretty frustrated at the moment. For the best part of a decade now, the interest rates offered on cash savings products such as cash ISAs and high-interest savings accounts have been absolutely abominable, meaning that it’s been hard to generate any meaningful amounts of interest on money that has been saved.

For example, looking at the savings market right now, the top easy-access cash ISA rate is just 1.45%, according to Martin Lewis’s site MoneySavingExpert.com. That rate is on offer from Virgin Money, assuming you only make two withdrawals per year. Similarly, the top easy-access savings account rate in the UK is currently 1.5%, which includes a ‘bonus’ rate of 0.15% for the first 12 months (how generous!), on offer from Goldman Sachs’ new savings product Marcus. Pretty dire, isn’t it?

Going backward

For most people, the exact rate they pick up on their cash savings won’t have a significant impact on their wealth. Whether savers are earning 1.4%, 1.45% or 1.5%, it’s probably not going to make much of a difference to their net worth, in reality. For example, even if you have £100,000 cash savings to invest, the difference between earning 1.4% and 1.5% per year amounts to just £100. Hardly a game-changer is it?

Furthermore, any money earning these kinds of pitiful interest rates is actually losing purchasing power over time, due to the fact that inflation (rising prices of goods and services over time) is much higher than that. UK inflation has averaged around 2.5% per year so far in 2018, meaning that cash savings growing at 1.5% per year in a bank account or cash ISA are going backward fast.

Forget the top cash ISA rate…

If I had a significant sum of money sitting in cash right now, I’d forget about searching for the top cash ISA rate, and instead, I’d look to deploy that money into assets that could generate a healthy passive income stream. Naturally, I’d keep some money in cash savings for emergencies, yet with the rest, I’d invest it in assets yielding 4%, 5% and even 6% that could actually make a difference to my overall wealth. 

Income generating assets

So where would I invest my hard-earned money? Well, one area I’d put some money into is dividend stocks. These are companies that pay out a proportion of their profits to shareholders in cash, on a regular basis. Here in the UK, we’re lucky because there are a large number of reputable companies that pay out big dividends to their investors regularly, and some of these companies yield 5% or higher.

Looking at the FTSE 100 index right now, there are numerous companies that offer dividend yields that thrash savings rates. For example, oil giant Shell currently yields 6.2%, which is over four times the best cash ISA rate. Then there’s Lloyds Bank, which offers a prospective yield of 5.8%. Even defence specialist BAE Systems now offers a yield of 4.8%.

Of course, dividend stocks are higher risk than cash savings and you need to be comfortable with the risks of investing in the stock market. Yet when you consider that you can pick up 5%+ from dividend stocks, versus just 1.5% from cash savings, the reward is worth the risk, in my view.

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Edward Sheldon owns shares in Royal Dutch Shell, Lloyds Banking Group and BAE Systems. The Motley Fool UK has recommended Lloyds Banking Group. 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.