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Warning! A Cash ISA can destroy your wealth: here’s why I’d buy FTSE 100 stocks instead

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A Cash ISA is an attractive investment for some investors right now. FTSE 100 stocks are volatile and bond yields are low. It’s hardly surprising that a few people may view cash as a safer alternative.

 However, UK inflation hovers around 1.2%, and only the very best Cash ISA rates will match this. To make things worse, you may be expected to commit your cash for a period of time to receive these rates. Most instant access Cash ISAs offer rates under 0.75%. This means that over time, your Cash ISA is losing you money.

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 When viewed from this perspective, a FTSE 100 company with a sustainable dividend could be an attractive and liquid investment, despite the stock price volatility.

FTSE 100 stocks overview

It’s no secret that the Footsie’s had a tough time of late. The coronavirus pandemic caused a global economic shutdown and a share price crash. However, collectively, FTSE 100 stocks have returned an average of 20% from their lowest point in March for investors who have snapped up great companies at low prices.

 Yesterday the Bank of England left interest rates unchanged due to the downturn being less severe than predicted. The reasoning is good news for the economy, and for the recovery potential of FTSE companies.

 However, the resulting strengthening of the pound against the dollar reduces paper profits for the more globally exposed firms. For resources and mining firms like BP and Glencore, this may offset any gains from rising oil and metals prices. It appears that some investors agree and are selling their shares, lowering share prices across the index in the short term. But this may be good news for investors in the long term.

 For example, BP is now trading around 295p, below its net asset value per share of 372p. And with a dividend yield of 6% after its cut, BP may be one of the best FTSE 100 shares to buy now.

Paper profits will fluctuate with currency exchange rates, often leaving cheap opportunities for savvy investors to snap up. All the while, the FTSE is rising again and increases in share price capital gains leave Cash ISA returns looking sheepish. 

But, if it’s income you’re after, there are some great dividend payers on the Footsie too.  

Sustainable dividend payers

Some analysts place the London Stock Exchange‘s 1.17% dividend yield on their Top 20 dividend payers list (but at the bottom). Other firms on such lists include reliable household names like GlaxoSmithKline and Diageo. At the top are firms like WPP, offering a dividend yield of 12.4%!

At these yield rates, if you hold a basket of the shares for the long term and reinvest the dividends, your compounded total return from the stocks could be substantial.

Investing in any one of these companies should give you better returns than a Cash ISA. As shares of large FTSE 100 firms, they also have the advantage of being liquid assets. If you need to cash in on your investment, you can. By contrast, taking money out of a Cash ISA with a notice period may be expensive.

With promising returns and the future looking brighter for FTSE firms, I’d buy FTSE 100 stocks to improve my wealth, rather than lose it via a Cash ISA.

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Rachael FitzGerald-Finch owns shares of BP, GlaxoSmithKline, and Glencore. The Motley Fool UK has recommended Diageo and GlaxoSmithKline. 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.

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