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Why I’d ditch a Cash ISA and buy FTSE 100-member Lloyds’ share price today

With a Cash ISA offering a paltry 1.5% income return, there are a number of FTSE 100 shares that could deliver significantly higher yields over the long run. Among them is Lloyds (LSE: LLOY), with its share price currently having a dividend yield of around 5.7%.

Clearly, the outlook for the stock is relatively uncertain at present. For example, trading conditions could prove to be challenging during Brexit. However, with a low valuation and an encouraging dividend outlook, the stock could offer a superior risk/reward ratio compared to a Cash ISA, as well as much of the FTSE 100.

Improving prospects

With Lloyds due to report a quarterly update this week, its shares could be volatile in the short term. However, recent updates from the company have shown it’s been able to deliver an improving financial performance despite continued downgrades in growth forecasts for the UK economy.

In the current year, the bank is expected to post a rise in earnings of 2%. While somewhat modest, it shows investor sentiment may be overly pessimistic at the present time. The stock trades on a price-to-earnings (P/E) ratio of 8.3, which suggests there’s a wide margin of safety available to new investors.

Moreover, the UK banking sector has generally improved in terms of its financial standing since the ‘great recession’. Lloyds’ capital ratios have steadily risen throughout the last decade, while it has arguably made more headway in reducing costs compared to many of its sector peers.

With the prospect of higher interest rates over the medium term, the wider banking sector may enjoy improving operating conditions where it’s possible to generate higher incomes. This may filter through to investors in the form of higher dividends.

Risk/reward

Although investing in the Lloyds share price is a far riskier prospect than having a Cash ISA, the potential for higher returns could make it a worthwhile move. As mentioned, it has an income return which is almost four times higher than that of the highest-paying Cash ISA. And since its dividends are currently covered 2.1 times by profit, they seem to be sustainable even in the event of a downgrade to its financial outlook.

Since Lloyds has a price-to-book (P/B) ratio of 0.9, investors may be able to buy its shares while they offer capital growth potential. This could mean its total returns over the long run significantly outpace those of a Cash ISA.

Therefore, investors who are able to adopt a long-term outlook and are comfortable with the prospect of share price fluctuation may be better off buying a slice of Lloyds, rather than having a Cash ISA. Since the latter’s return currently lags inflation and the former seems to have an improving outlook, the bank’s shares could prove to be a FTSE 100 bargain at the present time.

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Peter Stephens owns shares of Lloyds Banking Group. 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.