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How I’d beat a Cash ISA’s returns by 300% using FTSE 100 shares

At the present time, Cash ISAs offer interest rates of around 1.5%. While this may be higher than the returns they offered a couple of years ago, savers are seeing a reduction in their spending power as inflation is higher than 1.5%.

Looking ahead, the situation for holders of Cash ISAs may not improve. Interest rates are expected to remain low, while inflation could stay ahead of the income returns on Cash ISAs.

As such, with it possible to generate a 6%+ dividend yield from a portfolio of FTSE 100 shares, now could be the right time to switch your capital from a Cash ISA to the stock market.

Cash ISA woes

The interest rates on Cash ISAs may fail to improve over the next few years. Inflation has continued to remain below the Bank of England’s 2% target over recent months, which reduces the need for an interest rate rise.

Likewise, the uncertain outlook for the UK economy could mean that the Bank of England continues to adopt a dovish monetary policy. While this may help to stimulate the economy and provide higher employment levels and more robust GDP growth, it could well mean the 1.5% interest rate available on Cash ISAs at the present time declines over the next few years.

FTSE 100 income potential

By contrast, obtaining a generous income return on FTSE 100 shares has arguably become easier in the last couple of years. The uncertain outlook for the world economy has meant that many investors have become cautious about the prospects for the FTSE 100, which has caused many large-cap share prices to decline. In turn, this has pushed their yields higher so that around a quarter of FTSE 100 members currently yield over 5%.

Therefore, it’s possible for an investor to build a portfolio of FTSE 100 shares that together offer a dividend yield that’s in excess of 6%. That gives you an income return which is around 300% higher than a Cash ISA, with dividend growth having the potential to cause a widening of the difference over the long run.

FTSE 100 growth prospects

Of course, investing in the FTSE 100 is riskier than having a Cash ISA. There’s the potential for losses to be incurred, which could cause some stockholders significant disappointment.

However, the index’s downturns and bear markets have only ever lasted for relatively short periods of time. In the long run, the index has recovered to post new record highs. As such, holding on to your income shares for the long haul could lead to capital growth, as well as impressive income returns.

Therefore, now could be the right time to start building a diverse portfolio of income shares. They could lead to higher returns than a Cash ISA which ultimately improves your future financial prospects.

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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.