When it comes to growing your money for retirement, a Cash ISA isn’t going to get you what you want.
UK savers have long had the short end of the stick. This is clear from the frankly insulting level of interest you get for holding your money in a Cash ISA.
Even with 2019’s inflation at an historic low of 1.7%, the average 1.4% from a Cash ISA means you’re actually losing out every minute you hold your money there. Invest the maximum £20,000 in 2020 and by 2021 you’ll have — at most — only £280 to show for it.
Thankfully there are much better ways to benefit from compound interest. Along with the 6.6% dividend stock I cover below, the average dividend yield of the FTSE 100 is 4.4%. Invest the same £20,000 into a stock paying a relatively low level of 4.4% and in 12 months you’ll pick up £880.
Reinvest your dividends into stock, and in 2022 you’ll get 4.4% of £20,880: an extra £918.72 to take your new total to £21,798.72. That’s almost two grand of gains in two years. Hold on for longer and you’ll carry on getting wealthier with no extra effort.
It’s hard to know when to begin, I get it. The doom-mongers are saying a crash is just around the corner. The thing is, they’ve been saying that since 2016. If you’d have stayed out of the stock market for the last four years, keeping your money on the sidelines in a useless Cash ISA, you’d have lost out on the FTSE 100’s 29% gains. These are not numbers to be sniffed at and you’d definitely be richer now than when you started.
I’d counsel you should ignore stocks with dividends higher than about 8%. Historically that seems to be the sweet spot where companies can afford to make payments year after year.
Pick stocks like this
Start off with a solid 6.6% dividend payer like insurer Phoenix (LSE:PHNX), which owns Standard Life and Sun Life. Invest right now and you’ll get shares relatively cheaply. You’ll pay a very reasonable 10 times last year’s earnings for the stock, which means there’s much further for the price to appreciate, above and beyond any dividend payments, which would be a nice bonus.
Phoenix took a pre-tax loss of £128m in 2016, but things have picked up since then. 2017’s full year results showed revenue up £300m with losses cut to £7m, then 2018 was a bumper year, with earnings almost doubled to £2.6b and pre-tax profits back in the black at £259m.
CEO Clive Bannister is retiring in March 2020; under his nine-year leadership shareholders saw a total 179% return. I’m not worried about the future though, because Andy Briggs is taking over.
He’s a 30-year veteran of the industry, was CEO of Prudential’s retirement income branch, CEO of Friends Life before it was bought out by Aviva and last ran the UK insurance arm of the very same FTSE 100 favourite.
There are many more good long-term dividend paying stocks out there if you’re willing to look. Start now, and you’ll allow your money to start working for you, instead of losing out every year.
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Tom owns shares in Aviva. 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.