With interest rates expected to fall in 2020, the challenge of beating inflation through a Cash ISA could become more difficult. Over time, a negative real-terms return on your capital will lead to reduced spending power, which could hurt your long-term financial prospects.
As such, obtaining an inflation-beating income return from FTSE 100 shares could be a good idea. At the present time, around 25 of the index’s members offer a dividend yield which is in excess of 5%. Therefore, building a portfolio of income shares may prove to be more straightforward than many investors realise. It could boost your financial future at a time when the prospects for savers are relatively downbeat.
Holding your spare capital in a savings account or a Cash ISA has historically failed to match the gains on the FTSE 100. The index has recorded an annualised total return of 9% since its inception in 1984. In that time, the rate of interest on cash savings has fluctuated significantly and now stands at little more than 1%.
Due to low levels of inflation and an uncertain outlook for the UK economy as Brexit is delivered, a loose monetary policy looks set to stay in place over the next few years. This means that there is unlikely to be an improving outlook for savers, and they could find that amounts paid into a Cash ISA today can purchase fewer goods and services in the coming years.
Building a FTSE 100 income portfolio
Paying money into a Cash ISA is a simple and uncomplicated process. This is part of its appeal for many people, with it requiring little effort to administer.
Investing in the stock market can also be a straightforward process which requires far less effort than many people realise. For example, opening a Stocks and Shares ISA can be completed online in a matter of minutes. Similarly, building a portfolio of FTSE 100 shares can be a worthwhile process due to the potential returns that are on offer.
While the FTSE 100 carries greater short-term risk than holding a Cash ISA, its track record shows that it offers the potential for greater returns in the long run. Since a large portion of its historic returns have been derived from dividends, focusing your capital on income stocks could be a sound move. Furthermore, many large-cap shares have the potential to raise their dividends over the coming years to boost your income return.
Since the FTSE 100 is an international index that derives the majority of its income from abroad, it offers a significant amount of diversity. This could reduce risk and also lead to higher long-term returns as emerging economies look set to produce a relatively high rate of growth. As such, switching from a Cash ISA to the 5%+ income returns on offer in the FTSE 100 could be a shrewd move.
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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.