Cash ISAs are often the first place new investors look when they are uncertain about the future of the stock market. However in recent weeks, the interest rates available on these products have plunged. Therefore, buying FTSE 100 stocks such as Tesco (LSE: TSCO) may be a better alternative for investors over the long term.
Tesco shares offer inflation protection
Cash ISAs might seem to offer less risk than FTSE 100 shares, but owning cash has one main drawback. It provides almost no protection against inflation.
For example, over the past decade, the Bank of England has kept interest rates below 1%. Inflation has averaged more than 2% during this period.
That suggests that the purchasing power of cash in savings accounts has declined steadily since 2008. In comparison, FTSE 100 shares have returned 6% per annum for the past decade.
Unfortunately, Tesco shares have underperformed in this period. The stock has returned -2.7% per annum for the past 10 years. However, that may be about to change.
The past decade includes one of the most turbulent periods in the company’s history, the 2014 accounting scandal. Tesco has now put this crisis behind it and is pushing ahead with new growth initiatives.
These initiatives should help power the company’s bottom line higher over the long term. What’s more, Tesco should be able to increase the prices in its stores in line with inflation. This implies that the group’s earnings should grow in line with or slightly higher than inflation over the long run, which should translate into a positive performance for Tesco shares.
The group’s defensive nature should also help Tesco shares outperform going forward. As many companies have struggled in the coronavirus crisis, Tesco has prospered.
Sales have boomed, and while the company has had to invest money to cope with demand, initial projections suggest that the increase in sales will offset these higher costs for the year.
Government efforts to stimulate the economy through the coronavirus crisis, such as the suspension of business rates and other tax incentives, will also help the group’s bottom line this year, although these tailwinds are only expected to be temporary.
Nevertheless, Tesco is so confident in its outlook that it recently confirmed that it would be maintaining its dividend this year. That’s a luxury few other companies can afford right now.
At the time of writing, Tesco shares support a dividend yield of 4.1%. The business has a long track record of above-inflation dividend increases.
Furthermore, with the FTSE 100 stock trading 26% lower than it was at the start of the year, it appears to offer a wide margin of safety.
As such, while Tesco shares might not deliver tremendous capital gains in the short term, they appear to have the capacity to deliver above-inflation returns, with both income and capital growth over the coming years.
As well as Tesco, there are a handful of other FTSE 100 income stocks we'd buy right now.
With global markets in turmoil as the coronavirus pandemic tightens its grip, turning to shares to generate income isn’t as simple as it used to be…
As the realities of ‘life under lockdown’ begin to bite, many of the stock market’s ‘go-to’ high-yielding companies have either taken an axe to their dividend pay-outs… or worse, opted to suspended them altogether – for the near-term at least.
With so many blue-chip and mid-cap companies scrambling to hoard cash right now, where are we income investors to turn for decent yields?
Fortunately, The Motley Fool is here to help…
Our analyst has unearthed what he believes could be a very attractive option for income- seeking investors – a company that, in his view, boasts a ‘reliably defensive’ business model, combined with a current forecast dividend yield of 4.2% to boot!*
But here’s the really exciting part…
This business even has form in riding out this kind of situation, too… having previously increased sales and profits back in 2008 and 2009 when the world was gripped in the deepest economic crisis since the Great Depression.
*Please be aware that dividends are variable and not guaranteed.
Rupert Hargreaves owns no share 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.