The Motley Fool

Forget the Cash ISA! I’d buy this 5.8%-yielding passive tracker fund

The best Cash ISA on the market offers an interest rate of just 1.31%. This dismal rate of interest doesn’t even match inflation. As a result, opening one of these tax-free wrappers could actually cost you money over the long term.

Therefore, the stock market might be a better place for your cash. Indeed, some stocks currently offer dividend yields of more than 6%.

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A dividend fund

Picking dividend stocks yourself can be a tricky process. It requires plenty of time and effort, and even the professionals get it wrong occasionally.

With this being the case, it might be better to buy a dividend tracker fund instead. The great thing about these passive investments is that they do not require babysitting. All you need to do is buy the fund, sit back, and relax.

The best fund for income investors on the market at the moment is the iShares UK Dividend UCITS ETF. The goal of this ETF is simple. It seeks to track the performance of an index of 50 stocks with leading dividend yields in the FTSE 350.

To put it another way, the fund buys the 50 highest yielding stocks in the FTSE 350. This straightforward process means there’s little to no risk that the tracker will end up being high-risk, illiquid investments. There’s no chance of a Neil Woodford repeat here.

Blue-chip income

Currently, the largest holding in the fund is homebuilder Persimmon. The stock makes up around 5% of the fund. The rest of the holdings have an average price-to-earnings (P/E) ratio of 11. Meanwhile, the distribution yield of the fund is 5.8%.

Many of the companies in the portfolio would make poor investments by themselves. However, by using the basket approach, the fund can make the most of their market-beating dividend yields.

So, if you are looking for a simple way to buy a basket of cheap high-yield, blue-chip dividend stocks, the iShares UK Dividend UCITS ETF looks like an excellent investment. Also, the fund only charges an annual management fee of 0.4%. This is significantly lower than the 1% or more most other equity income funds on the market charge.

Adding to its appeal as an investment is the fact that the fund can boost returns by lending securities out to other parties. These third parties are typically short sellers who want to borrow stock to bet against companies.

Last year this increased performance by 0.04%. That’s not a huge return, but it’s better than nothing.

Reduced risk

Buying a dividend fund might seem riskier than opening a Cash ISA, but the diversification of the iShares offering helps reduce risk.

With risk spread across 50 blue-chip holdings, the chances of the fund producing a positive return over the long term are high.

By comparison, as the best Cash ISA rate on the market fails to match inflation, so it’s virtually guaranteed any money stashed away here well lose purchasing power.

A top income share with a juicy 6% forecast dividend yield

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With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.

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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.