While Cash ISAs may be more popular than buying FTSE 100 dividend stocks through a Stocks and Shares ISA, the latter could be a better means of making a million.
Not only do they offer a higher income return today, FTSE 100 dividend stocks also have recovery potential in many cases. They could also deliver high levels of capital growth over the long run.
As such, now could be the right time to buy a range of higher-yielding, large-cap shares, rather than holding on to savings within a Cash ISA.
Even though Cash ISA interest rates may have increased in recent months, they are still significantly behind those offered by FTSE 100 dividend stocks. In fact, over a quarter of the index’s members have dividend yields in excess of 5%, at the time of writing. This means an investor could realistically build a diverse portfolio of stocks that, together, have a yield that’s three or even four times the interest rate available on a Cash ISA.
Over the long run, even a modestly higher income return can really add up when compounding is factored in. As such, even if no capital growth is recorded, large-cap income shares could deliver a significantly higher return than cash.
Even though the FTSE 100 may only be trading a few hundred points higher than it did 20 years ago, in the coming years it looks set to post improving returns. In 1999, it was essentially overvalued due to it being in the midst of a wave of investor optimism centred on the dot com bubble. Now, though, the index appears to offer a wide margin of safety. This is evidenced by its 4.5% dividend yield, which is among the highest it’s been in the last couple of decades.
With the world economy forecast to grow rapidly as major economies such as India and China generate strong economic performances, the FTSE 100 could enjoy a tailwind over the long run.
While the FTSE 100 may have impressive growth potential, it also has a solid track record of recovery. In other words, even if it goes on to experience a bear market in the near term, there’s a good chance it’ll recover to post higher highs. In fact, it has done so following every recession and challenging period since it was formed.
As a result, investors who are worried about losing money on their investments may be able to reduce the chances of this happening by holding a diverse range of stocks over the long run.
Although a Cash ISA may be a lower risk than investing in the FTSE 100, the latter offers significantly higher returns. As such, for anyone who’s seeking to make a million, investing in blue-chip stocks could be a far more likely means of achieving that goal.
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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.