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I’d avoid the Cash ISA nightmare and buy the Lloyds Bank share price instead

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Forget watching a classic horror film this Halloween – simply check what rate’s currently available for your Cash ISA. Given that the best instant access account on the market pays just 1.46%, what you discover is far more likely to give you nightmares. 

For me, equities are always a better bet for those wanting to generate a better return from their savings. This is particularly the case when you have companies like Lloyds Bank (LSE: LLOY) paying big dividends. That said, today’s statement from the FTSE 100 financial powerhouse hasn’t been particularly welcomed by the market. No prizes for guessing why.  

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PPI hit

Thanks to being the most exposed to the scandal of all the UK banks, it’s unsurprising Lloyds was hit by a surge in PPI claims before the 29 August deadline. As a result, the £1.8bn charge over Q3 had a knock-on impact on pre-tax profit for the period, which came in at just £50m. This, in turn, has led Lloyds to report profits of only £2.9bn over the nine months of 2019 — a 40% reduction on the £4.93bn achieved in the previous year.   

Although it’s making progress in other areas — full-year operating costs are now expected to be lower than the £7.9bn previously estimated — some investors may have also become unsettled by the cautious outlook. Looking ahead, Lloyds said it “remains well-positionedto continue delivering for customers and shareholders,” but that ongoing economic jitters could still impact the business. 

Of course, a single set of numbers shouldn’t have much effect on those investing for income, especially as Lloyds currently yields 6%, based on a forecast 3.4p per share cash return this year. That’s 300% more than you can get with a Cash ISA.

With the PPI disaster soon to be in the past and dividends likely to be safely covered by profits, I maintain the bank warrants consideration from anyone understandably frustrated by their below-inflation Cash ISA returns. Right now, the shares also trade on just 7 times expected earnings — cheaper than FTSE 100 peers Barclays (8) and HSBC (11).

Safely covered

Another FTSE 100 stock whose dividends put the typical Cash ISA rate to shame is packaging firm DS Smith (LSE: SMDS). Today’s pre-close trading update for the first half of its financial year contains no horrors as far as I can see. Indeed, the lack of any shocks since its last statement at the beginning of September has led the company to stick with its expectations on its performance over the period.

A combination of “strong pricing discipline and cost improvements, together with modest box volume growth” should allow Smith to report “good margin progression” for the period, despite ongoing economic concerns in markets such as Germany. 

Having won new contracts in the US and Europe, volume growth will likely be “progressive” during H2. The company also reported that the integration of Europac was progressing smoothly and that it expected to complete the sale of its Plastics division by the end of 2019. 

Like Lloyds, DS Smith has an undemanding valuation at the time of writing, with shares trading at 10 times forecast earnings. That looks an attractive entry point to me, especially as the stock also comes with a likely 16.9p per share cash payout in this financial year. That translates to a very respectable 4.7% dividend yield, covered over twice by profits. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith 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.

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