In the current low-interest-rate environment, Cash ISAs don’t have much appeal, in my view. According to MoneySavingExpert.com, the best Cash ISA interest rate on offer right now is just 1.44%, meaning that if you invested £10,000, you’d only pick up £144 in interest for the year. Not much to get excited about, is it? Once you factor in inflation – which has averaged just over 2% in the UK over the last three months – your money is actually losing value over time.
However, the good news is that there are plenty of other ways to generate a higher return on your money right now. One such strategy is investing in FTSE 100 dividend stocks. In this article, I’ll show how you could potentially generate a yield of 7% on your money by investing in dividend stocks.
7% from FTSE 100 dividend stocks
Dividend stocks pay out a proportion of the company’s profits, in cash, to investors on a regular basis. The cash payouts are called ‘dividends’ and they’re generally paid twice, or four times, per year. The ‘dividend yield’ is a similar concept to the interest rate that a savings account offers.
Now, the UK’s FTSE 100 index is full of dividend stocks and many of them offer extremely attractive dividend yields right now. As a result, it’s quite easy for UK investors to put together a basic portfolio that pays a high level of income. Consider the following example:
This simple five-stock portfolio, which includes some of the most well-known companies in the UK such as Royal Dutch Shell, Lloyds Bank, and Legal & General, offers an average dividend yield of an incredible 7.1% – nearly five times the interest rates offered on the top Cash ISAs. That means that a £10,000 portfolio, split across the five stocks above, could potentially generate income of £710 per year – far more income than the interest you would receive if you put £10K in a Cash ISA.
Of course, this is just a simple example of a dividend portfolio. In reality, you’d want to own more than five stocks in order to lower your risk. But the message is clear – dividend stocks can deliver high income.
Risk versus reward
Now, before investing in stocks, it’s important to be aware of the risks. The main thing to understand is that stocks are a long-term investment. While the stock market tends to rise over the long term, in the short term, share prices can fluctuate, meaning you might not get back what you invested if you need access to your money in the near future. Secondly, unlike bank interest, dividends are not guaranteed. If the company’s profits fall, the dividend payout may be reduced. Overall, however, I see the risk/reward proposition as attractive. When you consider that you could pick up 7% from dividend stocks, versus just 1.4% from a Cash ISA, the choice is a no-brainer, in my opinion.
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Edward Sheldon owns shares in Legal & General Group, Lloyds Banking Group, GlaxoSmithKline, Imperial Brands and Royal Dutch Shell B. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Imperial Brands and 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.