For many people, taking risks with their hard-earned cash is not something they feel comfortable doing. After all, it is easy to lose money, and considerably more challenging to make it.
As such, Cash ISAs and savings accounts continue to be highly popular. They offer no risk of capital loss (unless more than £85,000 is held in a single banking group that goes under), as well as an interest income each year.
However, the problem with savings accounts is that their return is lower than inflation. Therefore, there is a risk that the spending power of any amount held within them falls. Over the long run, this can lead to significant disappointment.
As such, considering investing in dividend-paying stocks within the FTSE 100 could prove to be a worthwhile move for people who are aiming to have a £1m ISA.
Loss of spending power
With the very best Cash ISAs and savings accounts having interest rates of around 1.5% at the present time, it is not possible to generate an above-inflation return on cash. This means that every £1 held in cash is losing its spending power.
While in the short run, this may not present a significant problem, over the long run it can be damaging to wealth. It could mean that while an account balance rises over a period of several years, it becomes worth less than it was at the outset in terms of the goods and services it can purchase.
By contrast, investing capital in FTSE 100 dividend shares could increase a person’s wealth over the long run. The index currently has a dividend yield of around 4%. That’s more than twice the rate of inflation. Furthermore, the FTSE 100 has a strong track record of increasing dividends at a rate that is faster than inflation, which could lead to an even more generous income over the long run.
Alongside its income return potential, there may also be scope for capital growth. The index may fluctuate in price over the short run, but over the long run it has always recovered from its challenging periods to post new record highs.
Of course, there is a risk of capital loss when investing in FTSE 100 dividend shares. This may put off a number of people from buying shares, with the end result being that they focus on cash savings in their lifetimes.
Given the risk of a loss of purchasing power from cash savings, as well as the limited scope for an interest rate rise, investing at least a portion of wealth in a diverse range of FTSE 100 income stocks appears to be a sound idea. It could improve people’s long-term wealth prospects, while helping them to overcome the risks of inflation moving higher. Ultimately, it may prove to be a much better means of achieving a £1m ISA in the long run.
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