The best rates on a Cash ISA in May 2020 barely scrape above 1% a year. It’s an utterly pathetic rate of return. So instead of gaining just £100 a year on £10,000 of savings, I’d buy the best FTSE 100 shares to get rich.
Rock-bottom interest rates are the cause of this epic Cash ISA fail.
The Bank of England is so concerned about the state of the UK economy that it has slashed interest rates to 0.1%. There is even talk of governor Andrew Bailey doing the unthinkable and going to negative interest rates.
Cash ISA? No thanks
What does this mean for Cash ISAs? Banks pass on their costs to their customers pretty fast. So lower interest rates set by the central bank mean lower interest rates for Cash ISA customers.
So I’d buy shares instead and my choices for the best FTSE 100 shares with high dividend yields comprehensively beat anything you could hope to get from a Cash ISA.
This, in my opinion, is your best shot to get rich and retire early. On a £10,000 investment, a 10% annual dividend yield (which is perfectly achievable over time) would bring in £1,000 a year, 10 times better than a Cash ISA.
With the country facing a sharp recession, many companies are under pressure. But thankfully there are good FTSE 100 companies trading very well, even in our weak economy. So even with recession looming, there are good investments to be found.
Do your research thoroughly to buy the best dividend-paying FTSE 100 shares. Then use compound interest to reinvest any dividends and increase your stake in those companies.
And beware the traps of historically cheap FTSE 100 shares in sectors that will suffer in the coming UK recession.
Avoid this, buy that
I would avoid buying shares in high street banks at the moment, for example. Lloyds is trading at under 30p a share, by far the cheapest on the FTSE 100.
But in a super-low interest rate environment, Lloyds’ earnings will remain depressed for a long time to come. Analysts at broker Berenberg have said: “Banks have rarely appeared so cheap, although uncertainty has rarely been so high.”
Instead, I would be looking at high-yield FTSE 100 dividend-paying companies that make big earnings whether the sun is shining in the economy or there are storm clouds ahead.
I’m talking about the likes of British American Tobacco, which pays a 6.7% dividend yield when you buy its shares. It’s the second-largest tobacco company in the world.
There is also SSE, which has sold off its unprofitable consumer division and is focusing more on building and operating wind farms. I think it has one of the best outlooks for the future on the FTSE 100. It also still pays a high yield, at 8.2%.
And well-placed energy multinational BP is paying out at a yield of 10.4%. These are my choices for the best FTSE 100 shares. I believe an investment in these shares would comprehensively beat anything from a Cash ISA over time.
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Tom Rodgers has no position in 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.