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Unhappy with a 1.5% Cash ISA return? I’d buy FTSE 100 dividend shares today

Peter Stephens
Hand holding pound notes

With interest rates continuing to be close to record lows, Cash ISAs generally offer income returns that are 1.5% per annum or less. While this level may be higher than they have been in the recent past, it still lags inflation. This could mean that your savings gradually decline in terms of their after-inflation value.

Therefore, buying an asset that can offer a return that is above inflation could be a shrewd move. Furthermore, experiencing above-inflation growth in your income may help to increase it in the long run, which may improve your financial situation. As such, now could be the right time to buy FTSE 100 dividend shares.

Income returns

Although the FTSE 100’s income return of 4.4% may be almost three times higher than that of a Cash ISA, income-seeking investors can obtain a substantially greater return by investing in high-yielding stocks. In fact, around a quarter of the FTSE 100’s members currently yield over 5%. This means that it may be possible to put together a diverse portfolio of shares that together have a combined income return of around 6%. That would be four times the best returns on a Cash ISA.

In addition, many FTSE 100 shares have strong track records of delivering above-inflation dividend growth. This trend may continue in the coming years, since a wide range of large-cap shares rely on major, fast-growing international economies for their sales. This could allow them to reward shareholders to an increasing extent, which could translate into a rapidly-rising dividend over the long term.

Capital growth

Of course, a Cash ISA may appeal to some people due to the lack of risk of losing your capital. Provided you have less than £85,000 held at a specific banking group, you are covered from financial loss by a compensation scheme.

By contrast, investing in the FTSE 100 has been fraught with uncertainty and challenges since its inception in 1984. And, with there being a range of risks facing the world economy at the present time, it would be unsurprising for the index to decline in the coming months. After all, it has enjoyed a decade-long bull market.

However, the short-term volatility of the index should not be a major concern for long-term investors. Provided they have sufficient diversity in their portfolios, there is a good chance that a recovery will take hold. The index, for example, has recorded an annualised capital growth rate of around 6% since inception (excluding dividends), which shows how it has been able to overcome the various financial crises faced in the last 35 years.

Takeaway

Investing at least some of your capital in the FTSE 100 could be a good idea. It may provide an inflation-beating income return, as well as capital growth in the long run.

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Peter Stephens has no position in any of the shares 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 2019