Following the global financial crisis, life has been exceptionally tough for savers. Low interest rates have meant generating a passive income from cash savings has been highly challenging.
Looking ahead, this situation may persist over the coming years. As such, now could be the right time to invest some of your cash savings in FTSE 100 dividend shares. They offer the potential to treble your income, and also potentially generate capital growth in the long run.
Low interest rates
At present, obtaining an inflation-beating income return from cash savings is difficult. In most cases, savers are receiving 1.5% per annum, or less, from their cash balances. This means they require a vast amount of capital to generate even a modest income each year.
Meanwhile, the UK’s inflation rate is forecast to stay close to its 2% target over the medium term, while the risks posed by Brexit means that the Bank of England may decide to maintain a loose monetary policy to encourage economic growth. The result of this could be persistently low interest rates that fail to offer a positive real-terms income return for savers.
FTSE 100 dividend stocks
With the FTSE 100 currently containing 25 stocks that have dividend yields which are in excess of 5%, it is possible to build a portfolio of shares that together offer an income return that is three times that of cash savings. Furthermore, FTSE 100 companies have a strong track record of rewarding their shareholders through rising dividend payments. This could mean that, with interest rates unlikely to move higher in the next few years, the difference in passive income between a portfolio of FTSE 100 shares and cash savings widens yet further.
In addition, FTSE 100 stocks offer the potential to generate capital growth. The index has risen seven-fold since its inception in 1984. This amounts to an annualised return which is in excess of 5%. When this figure is added to its dividend yield, the index could realistically offer high-single digit total returns on an annual basis over the long run.
Clearly, investing in FTSE 100 shares is far riskier than having cash savings. There is a chance that you will lose money – especially in the short run when share prices may prove to be highly volatile.
However, risk can be reduced through diversification. Holding a number of companies that operate in a variety of geographies and sectors may limit your potential losses. And by identifying businesses that have solid balance sheets and strong cash flow, you may be able to reduce that risk still further.
As such, from a risk/reward standpoint it may be a good idea to move your capital from cash to shares. It could boost your income return and lead to capital growth in the long run.
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Peter Stephens has no position in any of the shares 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.