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Forget the top Cash ISA rate. I’d beat inflation with FTSE 100 dividend stocks

The interest rates on Cash ISAs could fall over the coming months. The UK currently has a relatively low rate of inflation, while economic uncertainty may cause the Bank of England to retain a low interest rate to support the wider economy’s performance.

As such, many savers may find their returns from Cash ISAs continue to lag inflation over the coming years. While this may not seem to be a significant issue in the short run, over the long run it can lead to a loss of spending power.

Therefore, now could be the right time to buy a range of FTSE 100 income shares. They may not only beat inflation in the current year, but could also deliver strong dividend growth in the long run.

Income potential

The FTSE 100 currently has a dividend yield of around 4.4%. That’s around three or even four times higher than the interest rates available on Cash ISAs. As such, buying a range of FTSE 100 shares could mean the income produced by your capital is higher than inflation.

Of course, many of the FTSE 100’s members currently offer higher yields than the wider index. Therefore, it may be possible to build a diverse and resilient portfolio of shares with a combined yield that’s in excess of 5%, or even 6%.

Moreover, the FTSE 100 has a solid track record of producing dividend growth. As an international index which relies on non-UK economies for most of its sales, it has the potential to benefit from a fast pace of growth in economies such as the US, India and China. They could allow FTSE 100 stocks to deliver above-inflation dividend growth in the long run, which boosts your overall returns and increases your spending power.

Return prospects

Clearly, Cash ISAs could produce improving income returns in the long run. Interest rates are unlikely to remain at low levels over the coming years, but the pace at which they rise could prove to be relatively slow. Moreover, their rise may be prompted by a higher rate of inflation. This could mean that even if Cash ISAs produce higher returns, their interest rates may continue to lag inflation and could cause a loss of spending power in the long run.

By contrast, the FTSE 100 has a solid track record of delivering not just an impressive income return, but also capital growth over the long run. As such, for income-seeking investors who are aiming to enjoy an inflation-beating income return, as well as growth investors who want to see the spending power of their capital rise in the long run, the FTSE 100 could offer superior opportunities compared to a Cash ISA.

Therefore, now could be the right time to start building a diverse portfolio of large-cap shares.

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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.