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In 2020, I’d forget the Cash ISA and instead invest in FTSE 100 dividend shares

Shares are by far my favourite investment class, but should cash be part of your investment strategy too? Cash certainly has its place in the financial world, but in terms of generating long-term returns, I’d much rather invest in FTSE 100 dividend stocks.

Cash ISAs

Recently, I have had several friends ask me if individual savings accounts (ISAs), especially Cash ISAs, could be right for them. I have referred them to the detailed government website on ISAs.

Individuals can divide their ISA annual subscription allowance in any way across a simple Cash ISA, a Stocks and Shares ISA, a Lifetime ISA (maximum of £4,000) or an Innovative Finance ISA.

Cash ISAs are savings accounts that pay interest that is free of income tax. Many Cash ISAs are instant access accounts where cash you put into UK banks or building societies is protected by the Financial Services Compensation Scheme (FSCS).

Should I keep my money in cash?

For most savers, Cash ISAs can provide peace of mind, and offer flexibility. Importantly too, cash may also provide ammunition for investors to buy stocks cheaper when share prices decline. Thus I believe that having a limited amount of cash in savings can be a good thing.

How much cash you should have at hand depends on your individual circumstances. Maybe between three months to six months of living expenses? But I personally don’t regard an emergency fund as an investment. 

If you are unsure about how much of your savings should be in cash, you may also benefit from discussing your own financial realities and expectations with a financial planner.

Investing for retirement

Cash savings in general pay a variable interest rate. Many savers use comparison websites to see what kind of an interest rate they can expect to receive. If you’d like to have instant access to your cash at any time, then currently you’d be looking at aroudn only 1.4% per annum.

I don’t favour Cash ISAs because of those rock-bottom interest rates on savings. They are unlikely to help me save for a comfortable retirement nest egg. On the other hand, many analysts agree that over the long-term, shares perform more strongly.

My Motley Fool colleagues regularly cover FTSE 100 as well as FTSE 250 shares and funds to consider adding to a diversified retirement portfolio. They point out that the stock market returns about 6% to 8% annually on average. Part of that return comes from regular dividend payments.

And London is home to a large number of shares offering generous dividend yields that can help you beat low Cash ISA interest rates.

Several FTSE 100 shares to consider

Many FTSE 100 shares have generous dividend yields that pay between 4% to 6% annually on average. 

Income investors also know that they can compound their returns through reinvesting dividends from high-yielding shares.  

At present, tobacco firm Imperial Brands offers a yield of 11.9%. Telecoms giant BT has a yield of 8%. WPP, the multinational advertising group, has a dividend yield of about 4.4%, and Royal Dutch Shell, the oil major, 6.6%. At the lower end, pharmaceutical giant AstraZeneca, whose share price has been on the rise in 2019, pays 1.8% in dividend yield (still higher than a Cash ISA).

If you are new to investing, then you could also buy into a FTSE 100 tracker fund and benefit from the 4.5% average yield here.

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tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca and Imperial Brands. 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.