It’s a tough time to be a saver right now. Shop around for the best easy-access savings account rate, or the best Cash ISA rate, and you’re not going to find much to get excited about.
For example, according to moneysavingexpert.com, the best easy-access (restriction-free) savings account rate is currently 1.45%. This is offered by the Marcus by Goldman Sachs savings account. Similarly, the best Cash ISA rate is also 1.45%. This is offered by Virgin Money.
I don’t know about you, but I see 1.45% as a pretty poor return. Let’s say I was to put £10K into one of these accounts – I’d only receive £145 interest for the year. Put in £20K, and I’m looking at less than £300 interest. That’s not going to help me retire early, is it?
When you factor in inflation (which has averaged around 1.9% in the UK this year so far), money earning 1.45% is actually losing purchasing power.
Worryingly, interest rates could remain low for years to come. With Brexit causing so much economic uncertainty, we’re not likely to see interest rates lifted back to a healthy level in the near term, in my opinion. As such, the outlook for cash savers remains quite bleak.
Of course, there are ways to generate a higher return on your money. One is to invest in dividend stocks. These are cash payments companies pay to their investors, out of their profits, on a regular basis. In the UK, there are plenty of companies paying their investors dividends, and some of the dividend yields are incredibly high.
For example, just look at the amazing yields on offer from these FTSE 100 stocks:
Royal Dutch Shell: 6.5%
Legal & General Group: 6.7%
Lloyds Banking Group: 5.9%
Imperial Brands: 12%
All of these yields are over four times the best easy-access savings account/Cash ISA rate. All you need to do to get your hands on the cash is own the shares. And if you own dividend stocks in a Stocks & Shares ISA, your dividends will be entirely tax-free.
Of course, there are risks to consider when investing in dividend stocks. Unlike a bank account, your capital is at risk when you invest in stocks because share prices are always fluctuating. It’s generally recommended you hold shares for at least five years, due to the fact they can be volatile in the short term.
It’s also sensible to spread your money across many different companies to lower your company-specific risk. In addition, it’s important to realise that dividends payouts are not guaranteed. They are linked to company profits, so if profits fall, dividend payouts can be reduced.
Overall, however, investing in dividend stocks can be a very effective way of boosting your wealth. When you consider you could potentially pocket a yield of 6%+ from dividend stocks, versus just 1.45% from a cash savings account or Cash ISA, the risk/reward proposition looks quite attractive, to my mind.
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Edward Sheldon owns shares in Royal Dutch Shell, Imperial Brands, Legal & General Group, Aviva, and Lloyds Banking Group. 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.