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Forget the top Cash ISA rate! I’d pocket 8.4% here

The best flexible Cash ISA on the market offers a disappointing interest rate of just 1.36% at the time of writing. And if past trends are anything to go by, this rate could fall a lot further over the next six to 12 months if interest rates stay where they are today. 

The good news is, you’re not limited to Cash ISAs when it comes to saving for the future.

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Stocks and shares are a great alternative. Right now there are plenty of stocks that offer dividend yields of 3%, 5%, or even 8.4% – far above the interest rate provided by the market’s top Cash ISA.

An FTSE 100 best buy 

An FTSE 100 stock that currently offers a dividend yield of 8.4% is homebuilder Persimmon (LSE: PSN).

Now we’ve got the general election out of the way, this company’s outlook has improved dramatically. The UK is crying out for new homes, and it appears as if the government is planning to bring in a range of incentives to help the country get building again. 

The conservative party’s manifesto promised longer term mortgages and discounted starter homes to help stimulate demand. On the supply side, Boris Johnson has mentioned a target of one million new homes by 2024. 

It remains to be seen whether or not these promises will become government policy, but what is clear is the fact that policymakers want to stimulate home building across the country. That’s good news for companies like Persimmon. 

Rising income

Persimmon has seen its income explode over the past six years as the company has rushed to build enough houses to meet demand. Net income has increased at a compound annual rate of 28% since 2013.

The company has been handing back a significant proportion of earnings to investors via dividends. Under management’s cash return policy, this trend is set to continue for the next few years. On current City projections, the company will pay out 235p per share for fiscal 2019 and 235p in 2020. These forecasts imply that the stock will yield 8.4% for the next two years based on the current share price.

Unless there is a sudden drop off in demand for new homes, which is unlikely considering the state of the market, I reckon it is highly likely that the company will meet these forecasts. 

Even if demand does drop to zero overnight, Persimmon has more than £800m of cash on the balance sheet. According to my calculations, that is enough to support the dividend for at least a year without any other income.

The bottom line

So, that is why I think this 8.4% dividend yielder could be a great alternative to a Cash ISA.

With profits rising, and policymakers committed to increasing homebuilding activity across the country, I reckon the only way for Persimmon’s profits from here is up. That suggests that the stock could offer the potential for capital growth as well as its highly attractive dividend yield. 

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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.