Dump your cash ISA! These FTSE 250 dividend stocks could protect your savings more effectively

The Motley Fool
Piggy bank next to a financial report
Piggy bank next to a financial report

Cash ISAs might appear to be less risky than equities at first, but with the average interest rate offered being less than 1%, the reality is that these products are actually terrible for your financial health.

You see, with inflation sitting just under 3%, an annual interest rate of 1% means the real rate of interest you are receiving is -2%. To put it another way, that cash ISA that seems so innocent is really costing you money.

With that in mind, here are two FTSE 250 stocks that I reckon offer a better investment proposition.

Established business

Pub group Greene King(LSE: GNK) was first incorporated in 1887, and today the group operates more than 3,000 pubs around the UK. Even though the pub industry is going through a tough time, Greene King is well positioned to weather the storm as one of the largest operators in the space.

Unfortunately, while the company is well positioned in the market, headwinds are likely to weigh on growth for the next few years. City analysts expect earnings per share (EPS) to flatline for the rest of this decade.

Still, what Greene King lacks in growth, it more than makes up for in income. Right now the shares support a dividend yield of 6.7%, and the distribution is covered 1.9 times by EPS, which indicates to me that this payout is sustainable even with stagnating earnings.

What’s more, the stock is cheap. It is currently trading at a multiple of just 7.8 times forward earnings, a near 50% discount to the rest of the market. This indicates that investors could benefit from both income and capital growth if sentiment towards the pub sector improves. If not, a dividend yield of nearly 7% is, in itself, difficult to ignore.

Bricks and mortar

If you’re not convinced by what Greene King has to offer, another company that I believe could be an excellent income investment is Newriver REIT(LSE: NRR).

Newriver is an interesting play on the UK commercial property market. The business has interests in shopping centres, retail warehouses and high street retail assets across the UK. It also owns a portfolio of pubs (although it does not manage them, unlike Greene King). These property assets produce a reliable stream of rent, topped up by income from property development activities.

The firm recently added to its portfolio by acquiring Hawthorn Leisure, which boosted the percentage of pubs in its portfolio to 20%.

As a real estate investment trust, Newriver has to return the bulk of its income to investors. City analysts believe the company will return a total of 21.8p per share to investors for fiscal 2019, rising to 22.4p for 2020. These numbers indicate a prospective dividend yield of 8.5% for 2019 and 8.7% for 2020 based on the current share price.

In comparison to the average cash ISA interest rate of just 1%, a yield of 8.5% is desirable and should not be overlooked in my view.

Under-The-Radar Investment

There are a number of small-cap stocks that could be worth buying right now, and our investing analysts have written a FREE guide called "1 Top Small-Cap Stock From The Motley Fool".

The company in question may have flown under your investment radar until now, but could help you to build a great income from your investments and retire early, pay off the mortgage, or simply enjoy a more abundant lifestyle. Click here to find out all about it — it's completely free to do so.

Rupert Hargreaves owns no 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.