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Forget Cash ISAs! I think the Lloyds share price is a better buy

The best interest rate for a flexible Cash ISA on the market at the moment is a pretty dismal 1.31%. The good news is, savers don’t have to accept this low level of income. Indeed, most FTSE 100 stocks offer higher dividend yields. Lloyds Bank (LSE: LLOY) is just one example.

Income investing

Lloyds is the UK’s largest mortgage lender, and it’s rapidly becoming one of the FTSE 100’s top income stocks. Over the past decade, the group has transformed itself from a basket case that required a state bailout, into one of the most profitable banks in Europe.

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This transition has yielded attractive returns (relative to the Cash ISA) for the lender’s investors. Over the past decade, the stock has produced a total return of 3.5% per annum. But this looks set to change. In the past two years, Lloyds has switched from being a recovery stock to an income play.

An income investment

Thanks to its efforts to rebuild the bank, management no longer needs to keep a close eye on the balance sheet. As a result, Lloyds has been able to hike distributions to investors.

Special dividends have become commonplace, and the company’s total dividend yield was 5.8% in 2019. This year, the City is forecasting an overall yield of 6.1%. That’s nearly five times higher than the best Cash ISA interest rate on the market.

Risks on the horizon

That said, this isn’t an investment without risks. Lloyds’ performance is tied to that of the UK economy, specifically the UK housing market. If house prices drop and defaults increase suddenly, the bank is going to have to curtail payout to shareholders.

However, it looks as if the chances of Lloyds being forced to cut its dividend are low. 

Every year, the Bank of England carries out a stress test on the UK’s major financial institutions. The testing aims to establish how strong the balance sheets of these financial service businesses are and prevent a repeat of the 2008 financial crisis. In the latest stress test, policymakers tested Lloyds’ balance sheet to see if it could withstand a 33% decline in home prices over three years. The bank passed with flying colours.

This suggests even in the most severe economic downturn, Lloyds will remain solvent. While it might have to cut its dividend temporarily, the results of the tests show that over the long term, Lloyds’ dividend yield is here to stay.

An ISA replacement

Therefore, if you’re looking for an alternative for the Cash ISA to stash your hard-earned savings, the Lloyds share price could be a good bet. In addition to its dividend potential, the stock is dealing at a price-to-earnings ratio (P/E) of 7.6, which suggests it offers a wide margin of safety at current levels.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.