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Forget a Cash ISA, a quarter of FTSE 100 dividends now yield more than 6%

Alan Oscroft
Various denominations of notes in a pile

According to the latest figures from investing services provider AJ Bell, the FTSE 100 is heading for an overall dividend yield of 4.8% in 2019, with the top index expected to pay out a record £92.6bn in dividend cash for the year.

So without any investing expertise or research at all, you can snag yourself a 4.8% annual income simply by buying a FTSE 100 index tracker fund. You’d have to pay, probably, a fraction of a percent per year in management charges, but it still seems like a much better choice than going for a Cash ISA.

In 2018, UK investors piled £39.8bn into Cash ISAs, and I really don’t understand why. Today’s best easy access interest rates are around 1.45%, and as that’s less than inflation it simply guarantees that a Cash ISA will lose you money in real terms.

Safer?

You might see a Cash ISA as safer, and the crash of of Neil Woodford’s investing career might put you off shares.

But for the long term, I reckon if I can get 4.8% in dividend income per year, that’s a winning move wherever share prices go. I don’t expect to be selling my shares for a decade at least, and stock markets tend to soundly beat cash savings over most 10-year periods.

And I think there are sound reasons why the next decade could be an unusually safe one for stocks, because UK share prices have been depressed by Brexit fears. That’s where today’s big yields partly come from — it’s a combination of healthy dividend payments being maintained while share prices weaken.

Dividends have strengthened so much that a full 25 shares on the FTSE 100 are now on forecast yields of more than 6%, with the biggest at the moment, Evraz, on a yield of 15.3%. Now, I’d caution against buying on yield alone, and the big Evraz yield comes from a slump in the share price with an earnings fall on the cards.

Pick your own

But if you spread your cash in equal amounts across those 25 stocks, you’d get an average forecast yield of 7.9%, blowing away anything you can get from a Cash ISA. Now, you may well not have enough investment cash for a cost-effective allocation across that many shares, but all I think you need to do is make a diversified selection from across the index.

There are three housebuilders in the top 25 list, with Taylor Wimpey offering an 11.9% yield, Persimmon on 11.5%, and Barratt Developments down a bit at 7.5%. So maybe just pick one of those.

A couple of my favourite insurers make the list too, with Aviva on a yield of 8.3% and Legal & General on 7.5%. Motor insurer Admiral is offering a 6.1% yield too, and there’s Phoenix Group on 7.1%. So pick one of those four and you’ve already narrowed down seven potential investments to two.

Building nicely

Fancy a depressed bank? Pick from the 6.9% yields from Royal Bank of Scotland or HSBC, Lloyds‘ 6.6%, or 6.1% at Barclays, and a field of 11 stocks has become three.

Then add either BP (6.7%) or Shell (6.6%), pick from mining stocks Rio Tinto (7.8%), BHP (6.6%) or Glencore (6.3%), and you’ve got a nicely diversified five-stock start to a long-term portfolio that I reckon will wipe the floor with a Cash ISA.

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Alan Oscroft owns shares of Aviva, Lloyds Banking Group, and Persimmon. The Motley Fool UK has recommended Admiral Group, Barclays, HSBC Holdings, and Lloyds Banking Group. 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