Forget 1.5% from a cash ISA. I’d rather buy the Aviva share price and BAE share price instead

People think saving in a cash ISA offers security, but the only certainty you will get is that the value of your money will fall in real terms. With the average cash ISA paying 1.5% and inflation at 2.2%, that is baked in.

Blue-chip income

While everyone should hold some cash for emergencies, I think you also need exposure to the greater growth and income prospects offered by stocks and shares. Here are two top FTSE 100 companies to consider.

My first pick is insurer Aviva(LSE: AV), a household name blue-chip with a market cap of more than £16bn. It was founded 322 years ago and now offers insurance and savings products to more than 33 million customers worldwide. Incredibly, it currently has a forecast yield of 7.4%, almost five times the interest rate on the average cash ISA, plus you get the opportunity for share price growth if stock markets rise.

Fighting back

Like many stocks on the FTSE 100, Aviva’s stock has struggled lately. It has fallen a whopping 17.5% in the past 12 months while the index as a whole fell just 6%. It is actually down 5% over five years, while the index is up 5%. Rival insurer Legal & General Group has done better, rising 13%, so why has Aviva underperformed?

It has been hit hard by Government plans to tighten regulation of the equity release lifetime mortgages market, in which it is the biggest single player. Embarrassingly, it had to pay £14m to investors who lost money selling preference shares following Aviva’s controversial announcement that it planned to cancel the shares.

Chief executive Mark Wilson’s announcement that he was leaving also came as a surprise, as he had worked hard to turn the business around.

Back to earth

One attraction is that you can now buy the stock at the bargain valuation of just 7.1 times earnings, half the average for the FTSE 100. The other major attraction is the aforementioned yield, which is forecast to hit 8.2% by the end of next year and has solid cover of 1.9. Share price growth has been weak but it has recovery potential in the longer run.

Engineer BAE Systems(LSE: BA) has also had a rough time lately, its share price down more than 20% in the last six months. It was punished by October’s stock market slump and concern about the UK’s relationship with important customer Saudi Arabia following the Jamal Khashoggi murder.

Ready for take-off

First-half results disappointed, with revenue down 5% to £8.2bn and operating profit falling 7% to £792m. It attracted £9.7bn of orders, down from £10.65bn, although it still boasts a massive order backlog of £39.7bn.

Earnings are expected to fall 2% this year but 2019 looks more promising with City analysts predicting an 8% rise. BAE Systems will sit well in any portfolio of UK stocks and now could be a good time to buy into its bargain valuation of 11.1 times earnings.

Although its income falls short of Aviva’s dizzying levels it still offers a robust forecast yield of 4.5%, with cover of 1.9. And you want to leave money in a cash ISA? Really?

Five Income Stocks For Retirement

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harveyj 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.