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

Sick of earning 1.5% on your cash savings? Read this now.

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.

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.

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.

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.

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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »