If you’re looking for a best buy Cash ISA, then brace yourself for disappointment. The top rate you can get right now on instant access is just 1.36%. If you’re willing to lock your money away for five years, you can squeeze out 1.75%. After more more than a decade of rock-bottom interest rates, with little sign of respite, the Cash ISA no longer cuts it.
The stock market is a different matter. It’s on its longest bull run in history, making investors rich. Those who left large sums in a Cash ISA when they could have invested in a Stocks and Shares ISA will be kicking themselves.
Stock markets don’t go straight up, of course, and nor do individual company share prices. The Tesco (LSE: TSCO) share price fell when the company lost its way during Philip Clarke’s spell in charge, amid profit warnings, falling sales, the horsemeat controversy, and a £250m accounting scandal. But it’s been on an upwards trajectory since CEO Dave Lewis took over in 2014.
Income and growth
I would rather accept the higher level of risk that comes from investing in a top FTSE 100 stock like this one than doom my money to a slow death, by leaving it in a cash account paying less than the inflation rate.
Tesco’s share price is up more than 17% over 12 months which, on its own, thrashes what you would have got in cash. However, the attraction of top stocks like this doesn’t just come from the share price, but the regular dividend payments they hand out to shareholders as a reward for holding their stock.
Tesco stopped its dividend payments after the accounting scandal, but Lewis restored them in 2017 and they’re increasing steadily. The current forecast yield is 3.6%, nicely covered twice by earnings. But by next year that should have hit 3.9%, and hopefully there’ll be plenty more progression after that.
This is far more income than you will get on a Cash ISA and, just as importantly, it’s a rising income, one that should increase over time.
Higher risks, higher rewards
Now Tesco as a business still faces challenges. Although wages are finally rising faster than inflation, shoppers still don’t feel flush with cash. Competition is intense, as Aldi and Lidl expand aggressively. The group’s margins are wafer thin, at just 3.4%. The economy is uncertain. The Competition and Markets Authority is calling for action after Tesco unlawfully blocked rival supermarkets from opening shops near its stores. Coronavirus worries overhang everything.
All of these issues could knock the Tesco share price. However, City analysts remain optimistic about its long-term earnings potential, predicting growth of 24% this year, followed by 8% and 7% over the next two years.
Lewis is also set to leave in the summer after a successful five-year stint, and investors will miss him. But I’d still buy Tesco’s stock ahead of a Cash ISA.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.