Cash ISA interest rates are on the floor. The best rate I can find is below 1%, even if I tie up my money for a five-year term. So, instead of cash savings, I’d put my money in high-yielding stocks.
High-yielding stocks differ in quality
And, to me, the best stocks are backed by defensive, cash-generating businesses. Indeed, such enterprises tend to be least affected by the ups and downs of the economy. Unlike more cyclical outfits such as banks, housebuilders, retailers, oil companies and others. Although, at times, the cyclical companies do have big dividend yields.
But cyclical businesses are prone to collapsing earnings, share prices and dividends. And we never know for sure when such events will affect a cyclical stock. And, to me, that means high dividend yields differ – some are higher quality and potentially more sustainable than others. So, it’s important for me to choose my high-yielding stocks carefully.
One sector that tends to deliver consistent cash flow and earnings is the energy utility sector. And, within it, I’m keen on SSE (LSE: SSE). Indeed, with the share price near 1,372p, the forward-looking dividend yield is around 6% for the trading year to March 2022. And forward earnings should cover the dividend fully.
The 6% dividend income compares favourably with the low rates paid by cash-savings accounts. And if I plough my dividend income back into my investment, I’ll be compounding at a decent rate. However, one criticism of share ownership is that share prices don’t remain stable in the way a cash balance would in a savings account.
And that’s true. Share prices can move up and down. But SSE’s share price has been trading in a tight range for around 15 years. The fluctuations have been within a band dropping to around 33% below the peak value occasionally. But, essentially, the stock’s been moving sideways over time. And I think the relative stability of the share price reflects the consistency of the business. Indeed, demand for energy tends to remain quite stable.
Investing for the long haul
I’d aim to overcome the volatility in the share price by holding my shares for the long haul. Compounded gains will likely deliver a satisfactory overall return from a long-term investment. On top of that, share price movements have the potential to work to a shareholder’s advantage. Indeed, if SSE makes more profits the share price could rise to reflect the improved situation. For example, profits may rise because energy selling prices move higher to keep up with general price inflation.
I think holding shares like SSE could be a good way to build the value of my invested money. And I reckon there’s more chance of a decent outcome than putting money in a cash savings account. Meanwhile, SSE has a strong commitment to shareholder dividends. The company said in July, the dividend “provides income for people’s pensions and savings and is particularly vital given the economic consequences of the coronavirus pandemic.” I reckon the firm will likely keep paying dividends for many years to come.
The post I’d forget the top Cash ISA rate and pocket 6% with this high-yielding stock appeared first on The Motley Fool UK.
Kevin Godbold has no position in any share 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.
Motley Fool UK 2020