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Cash ISA rates are falling again, but I like BATS that pays 6.85% a year

Harvey Jones
Hedge shaped as the pound symbol inside a glass piggy bank

If you’re looking for a best-buy Cash ISA then brace yourself, the interest rates are truly dreadful and worse, they are continuing to fall.

Time to dash from cash

The average instant access Cash ISA now pays a meagre 0.95%. You’ll get only slightly more if you lock your money away, with the average long-term fixed rate Cash ISA paying just 1.35%, down from 1.62% in March. These are a truly dismal returns, and they could fall even lower as analysts increasingly expect the Bank of England to cut base rates from today’s 0.75%, rather than increase them.

Yet at the same time, the FTSE 100 is yielding income of 4.5% a year, while established blue-chip stock British American Tobacco (LSE: BATS) is paying income worth an astonishing 6.85%.

This £68bn behemoth is the best performing stock on the index over the past 50 years. If you had invested £1,000 in October 1969, it would be worth an incredible £3.44m today, with dividends reinvested, whereas £1,000 in the average easy access savings account would have grown to just £12,960.

A repeat may be unlikely given that smoking is in long-term decline in the West. But British American Tobacco has compensated by aiming to win a greater share of a shrinking market and targeting growth in emerging markets, where smoking rates remain high.

Up in vapour

It has also been pursuing e-cigarettes and vaping, but the strategy has backfired amid a US regulatory clampdown aimed at curbing the rise of teenage vapers, and growing fears over vaping-linked deaths and illnesses.

You may decide you want nothing to do with this industry – and that’s fair enough. If so, plenty of other top FTSE 100 companies can thrash the low returns on Cash ISAs. Here are three stocks that could help you enjoy a luxury retirement.

As wealth platform AJ Bell has just pointed out, British American Tobacco shareholders will be looking for some reassurance when it publishes its next trading statement on Wednesday, following a profit warning from rival Imperial Brands, and a decision by US tobacco company Altria to write down the value of its $12.8bn investment in vaping leader Juul by $4.5bn, less than a year after taking a 35% stake.

CEO Jack Bowles is looking to cut costs and simplify the firm by removing layers of senior management, while boosting sales from so-called New Category products, by up to 50%.

Bargain valuation

British American Tobacco still enjoys attractive operating margins of 38.4%, with a stonking return on capital employed of 133.5%. Its yield looks safe for now, and City analysts expect it to actually increase, to hit 7.4% this year, and a mighty 7.8% next.

Yet the group trades at a bargain price of 8.8 times forward earnings, only half the 15 times that is typically seen as representing fair value.

Individual company stocks are more risky than Cash ISAs, so you should only invest money you do not expect to need for the next five years or so, to give you time to overcome short-term volatility. Shares are long-term investments and can give you a winning combination of both income and growth, rather than the lousy rates you now get on a Cash ISA.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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.

Motley Fool UK 2019