Forget the Cash ISA! I’d get a 4% yield from the FTSE 100

The FTSE 100’s 4.3% dividend yield eclipses the income offered by most Cash ISAs today, and investors should take advantage says this Fool.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Banks have really let Cash ISA investors down in recent years. Interest rates on these products have plunged in the past decade, and now the best rate on the market for a flexible Cash ISA stands at just 1.31%.

If you are happy to lock your money away for a bit longer, you can achieve a better interest rate. However, you don’t get that much extra for agreeing to lock up your funds.

For example, the top one-year fixed ISA offers an interest rate of just 1.41%. If you lock your money up for two years, the best rate you can get is 1.5%. And for three years, it is 1.67%.

Considering these figures, if you are serious about saving for the future, it might be better to avoid Cash ISAs altogether and go with a Stocks and Shares ISA instead.

Stocks and Shares ISA

The one primary advantage that Stocks and Shares ISAs have over cash ISAs is the ability to be able to invest anywhere.

Indeed, with Stocks and Shares ISAs, you can invest in thousands of stocks, bonds and funds around the world. Most of these stocks offer dividend yields far above what you would get with a Cash ISA.

In addition to the higher level of income, the capital value of these assets can also increase over time. That’s something you don’t get with cash.

Buying the FTSE 100

One of the best ways to invest in the stock market is to buy a low-cost passive tracker fund.

A low-cost FTSE 100 passive tracker fund would give you exposure to the 100 largest listed companies in the UK. When you’ve acquired one of these funds, you don’t need to do anything else. All you need to do is sit back, relax and let the fund managers do the hard work for you.

A tracker fund only replicates the performance of its underlying index. Therefore, there’s no stock selection risk, which means there’s a low risk the manager will make a severe stock-picking mistake that costs you money.

Annual returns

Since its inception more than three-and-a-half decades ago, the FTSE 100 has produced an average yearly return of 9%.

It isn’t straightforward to predict whether or not this trend will continue going forward, but what we do know is that the index currently supports a dividend yield of 4.3%. This is significantly above the level of income most Cash ISAs offer today.

As a result, investors buying a low-cost FTSE 100 tracker fund right now are entitled to a much higher level of income than most cash savings accounts.

On top of this, there’s the potential for capital gains. As the figures above show, capital growth has added 4.7% to performance every year for the past three decades — an excellent bonus for investors.

As such, opening a Stocks and Shares ISA and buying an FTSE 100 tracker fund seems to be a much better option than accepting the low rates offered by Cash ISAs today.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »