Forget 1% from a Cash ISA. I’d pick up 6%+ from FTSE 100 dividend shares

The FTSE 100 (INDEXFTSE:UKX) could offer an income return that is significantly higher than a Cash ISA.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While the FTSE 100 has historically offered an income return that is attractive when compared to a Cash ISA, the difference between the two investments is currently relatively wide.

In fact, while a Cash ISA can be expected to return 1% per annum on average at the present time, there are 26 shares in the FTSE 100 with yields over 6%. This means that an investor could realistically build a portfolio of large-cap stocks that, combined, has a dividend yield in excess of 6%.

Certainly, there are greater risks facing investors in shares versus a Cash ISA. But the index could also offer capital growth potential in the long run.

Income returns

While a 1% return from a Cash ISA may increase over the long run as interest rates rise, the UK is expected to maintain a loose monetary policy over the coming years. The Bank of England may wish to remain supportive of the economy at a time when political risks are heightened, and this could lead to it delaying interest rate rises.

In fact, UK interest rates are forecast to be around 1% by 2022. This suggests that inflation is likely to beat the returns on Cash ISAs, which could cause the spending power of cash holdings to decline.

During that time, FTSE 100 shares yielding over 6% could increase their dividends. In many cases, this may be at a higher pace than inflation, which could cause the difference in income returns between stocks and cash to further increase.

Capital returns

While there is no capital loss from having a Cash ISA, there is also no prospect of capital growth. This contrasts with the FTSE 100, which has historically offered a total return that is in the high single-digits on an annualised basis.

For example, the index has risen seven-fold since its inception in 1984. Although not every investor will have such a long-term horizon, those who are able to overcome the ebbs and flows of the index in the short run are likely to be rewarded by a relatively high rate of growth in the long run.

Moreover, with the world economy continuing to grow at a robust pace, a number of large-cap shares could prove to be cheap at the present time. This could further enhance their return potential, with them offering favourable risk/reward opportunities in many cases.

Future prospects

While the potential for a global trade war could lead to increasing volatility for investors in FTSE 100 companies, the return potential they offer could mean their overall appeal is high.

By contrast, a Cash ISA looks set to lack attractive returns over the medium term. This could inhibit its ability to offer a passive income, as well as capital growth, for a variety of investors.

As such, now could be the right time to invest excess capital in a range of FTSE 100 dividend shares and hold only modest amounts of money in a Cash ISA.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »