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Forget a Cash ISA…I’d buy FTSE 100 income stocks instead!

Cash ISAs can be a great tool to save for the future. However, in recent years, the interest rates available on these products have plunged.

The best easy-access Cash ISA interest rate on the market at the moment is just 1.36%, but even then you can only make two withdrawals per calendar year. The best interest rate on an account that allows unlimited withdrawals is 1.34%.

You can earn a bit more money if you lock your money up for longer, but not much. The best interest rate available on a one-year fixed Cash ISA is 1.44%.

And if you want to earn more than 2% per annum, then you are going to have to commit to locking your money up for a minimum of five years.

The good news is, Cash ISAs are not the only tax-efficient wrappers you can use to save for the future. You can also invest in the stock market with a Stocks and Shares ISA, and this might be the better option if you want to make your money work harder for you.

High-yield champions

The FTSE 100, the UK’s leading blue-chip index, is full of dividend champions. The index currently supports an average dividend yield of 4.5%, but just under half of its constituents yield more than this.

The average dividend yield of the 10 top-yielding stocks in the FTSE 100 is a staggering 8.8%! That’s 6.5 times higher than the best flexible Cash ISA interest rate on the market at the moment.

There are three ways investors can play this trend, buying the FTSE 100 directly, buying the FTSE 100 constituents with the highest dividend yields or investing in a high-yield income fund.

Picking individual stocks is a tricky process, even the professionals get it wrong more often than not, and with that being the case, I think the best option is to own a dividend fund instead.

Best income play

One of the best high-yield funds for income seekers is the iShares UK Dividend UCITS ETF, and if I had to pick just one way of investing in London’s highest-yielding stocks, this would be it.

The ETF manages a portfolio of 50 stocks, companies picked explicitly because they have the highest dividend yields in the FTSE 350 index.

The majority of the companies that currently feature in the exchange-traded fund are FTSE 100 income champions. Seven of the top 10 holdings are FTSE 100 stocks.

The fund supports a dividend yield of 6.7% at the time of writing, and the average P/E ratio of the holdings is just 10.2. So, if you are looking for a way to buy a basket of the cheapest blue-chip dividend stocks listed in London today, the iShares UK Dividend UCITS ETF appears to tick all the boxes.

And I think this could be a great alternative to a Cash ISA. Not only does the fund offer that chunky dividend yield, but it also offers the potential for capital gains as well, which is something you just don’t get with cash savings products.

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Rupert Hargreaves owns no share 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.