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Don’t accept a 1.5% Cash ISA return. I’d buy 5%+ FTSE 100 dividend stocks today

With interest rates continuing to be at historic lows, the prospects for savers remain highly challenging. In fact, inflation is higher than the top returns available on a Cash ISA of 1.5%. This means, over time, the real-terms value of money held in a Cash ISA could fall.

Looking ahead, a slow pace of interest rate growth is expected to take place. This may mean inflation remains above interest rates, and that Cash ISAs continue to be unappealing.

By contrast, the FTSE 100 has a large number of shares that yield over 5%. Buying them now, during a period of uncertainty, could lead to relatively high returns in the long run.

Buying opportunity

Of course, buying FTSE 100 shares while the index faces a period of uncertainty may be seen as an unwise move by some investors. After all, risks such as a global trade war and Brexit may cause the coming months to be a period of volatility and change for a wide range of the FTSE 100’s members.

However, the track record of the index suggests such periods are the most opportune to buy shares. In fact, any investor who wishes to buy stocks on low valuations and sell them at a higher price further down the line may be better off adding to their portfolio during periods of uncertainty for the index. After all, for a company’s shares to trade at a low price there must usually be a reason.

Return potential

As well as being able to obtain a 5%+ yield from buying a range of FTSE 100 shares, investors may also benefit from the growth potential of the index. A number of its members are forecast to post improving levels of profitability in the coming years, as well as in the long run, since the growth prospects of countries such as the US and China remain high.

The track record of the index shows it has been able to recover from every downturn it has faced. Despite challenges such as the late-80s crash, the dot com bubble, and the financial crisis, the index has risen seven-fold from its starting price of 1,000 points in 1984. Over the next 35 years, it would be unsurprising for it to deliver similar levels of growth, with investors who are able to look past the short-term risks facing the index likely to be handsomely rewarded.

Capital loss

While there may be paper losses along the way that make a Cash ISA seem more appealing for short periods, over the long run the income prospects of the FTSE 100 means buying a range of stocks today could prove to be a sound move.

Continued low interest rates and the appeal of a range of large-cap shares means now may be the right time to pivot towards the FTSE 100.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.