Forget the Cash ISA! I’d buy bargain FTSE 100 dividend stocks

Cash ISA rates are plunging, but investors have plenty of other options to generate a higher level of income, 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.

The FTSE 100’s recent market crash may understandably push some investors to consider assets that could offer lower risks.

Assets such as the Cash ISA offer the potential for steady returns with no volatility. However, with interest rates expected to remain low over the medium term, the return on a Cash ISA could prove to be disappointing.

As such, buying FTSE 100 shares could be a sound move. These stocks offer the potential for significant capital gains and income over the long run.

Cash ISA drawbacks

The biggest drawback of opening a Cash ISA is its fixed return. Today, the best flexible Cash ISA interest rate on the market is just 1.19%. That rate may not even cover inflation over the long term. On the other hand, most FTSE 100 dividend stocks tend to increase their payouts every year.

Unfortunately, it doesn’t look as if this trend will be repeated in 2020. Many FTSE 100 dividend stocks have already cut their dividend payouts to preserve cash and strengthen their balance sheets.

As such, buying FTSE 100 shares today may seem like a risky move. It could be some time before these companies reinstate their shareholder distributions. Meanwhile, opening a Cash ISA provides an immediate, if modest, passive income

However, the index’s track record shows a recovery is very likely. It may take some time, but evidence shows that over a span of 10 years or so, the FTSE 100 always produces positive returns. The average annual return over the past three-and-a-half decades is around 7%.

This suggests investors who buy a basket of FTSE 100 stocks at present are likely to experience strong total returns in the coming years. These strong returns may also come with shape declines, but long-term investors should be well rewarded.

The reinvestment of dividends

A large proportion of the index’s past total returns have been derived from the reinvestment of dividends. So, if you’re looking to outperform the Cash ISA over the long run, dividend stocks are the way to go.

Nevertheless, as mentioned above, a range of FTSE 100 companies have cut their dividends over the past few weeks. This suggests the best way to capitalise on the power of dividends over the long run is to buy a basket of dividend stocks. This could increase the potential for attractive long-term returns while reducing risk at the same time.

Now could be the perfect opportunity to build a strategy based around the reinvestment of dividends. Many income shares are currently trading at exceptionally low valuations. Some blue-chip stocks even offer dividend yields of nearly 10%. That makes the level of income on offer from the market’s top Cash ISA look rather insulting.

With this being the case, buying FTSE 100 dividend stocks today could be an excellent way to build your financial nest egg. You could even replicate the tax benefits of a Cash ISA by using a Stocks and Shares ISA.

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 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.

More on Investing Articles

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 »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »