Obtaining a 1.5% interest rate from a Cash ISA seems to be wholly unappealing when there are stocks in the FTSE 100 that have yields of over 5%. While in the short run they carry a risk of capital loss, in the long run they could generate impressive income returns.
Likewise, there are a number of growth opportunities within the FTSE 100 that seem to be undervalued at the present time. They appear to have improving financial prospects and strong positions within their industries, which could mean that they are able to generate capital growth for their investors over the long run.
Since the FTSE 100 currently has a dividend yield of 4.3%, its income return is almost three times higher than the best Cash ISAs that are currently on offer. It is, of course, possible to generate a much higher income return from FTSE 100 shares, since a number of them have yields that are above 5%, and even 6% in some cases. Therefore, an investor who is looking to generate a second income from their capital may be better off seeking out FTSE 100 dividend stocks rather than investing in a Cash ISA.
In many cases, FTSE 100 companies with high yields have improving financial outlooks, as well as solid balance sheets. Although there is a risk of capital loss from investing in them, since they are large-cap shares they generally have diverse business models and track records of solid financial performance that means they are lower risk when compared to the wider stock market. As such, their risk/reward ratios could be more appealing than savers using a Cash ISA may realise.
Although the FTSE 100 has already made gains of over 12% since the start of 2019, it appears to offer good value for money. It trades around 5% below its all-time high, while a range of its members have price-to-earnings (P/E) ratios that are below their long-term averages. This suggests that there could be capital growth on offer across a variety of industries.
Since the FTSE 100 is an international index that generates the vast majority of its income from outside of the UK, it could provide investors with the chance to access higher growth rates across the global economy. With the UK’s GDP growth rate being somewhat sluggish despite recent upgrades, it could be beneficial to an individual to have exposure to the wider global economy.
Certainly, having some cash savings is a good idea. They can provide security and peace of mind. But with the return on a Cash ISA being incredibly low compared to the FTSE 100, buying a diverse range of income and growth stocks right now could prove to be a sound move over the long term. The index’s risk/reward opportunity could be highly appealing relative to other mainstream assets at the present time.
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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.