Forget 1.5% from a Marcus account. I’d buy 4%+ FTSE 100 dividend stocks instead
The Marcus savings account has proved to be popular among savers recently. That’s unsurprising, since it offers a rate of 1.5% at a time when easy-access savings accounts have an average rate of around 0.6%.
The problem, though, is that 1.5% is still significantly below inflation of 2.4%. As such, a Marcus account is expected to deliver negative real-terms returns over the next year. At a time when the FTSE 100 is yielding over 4%, I think now could be the right time to focus on large-cap dividend shares with high yields.
Negative returns
While a 1.5% interest rate may sound high at a time when savings rates are low, the reality is that it is expected to destroy wealth in real terms. In other words, every £1 invested at an interest rate of 1.5% is likely to have less spending power in future as a result of inflation being 0.9 percentage points higher. With Brexit having the potential to cause inflation to spike depending on the eventual outcome, the negative real-terms return could increase yet further over the coming months.
Of course, cash has often failed to deliver positive real-terms returns in recent years. Interest rates are close to historic lows, and while they may increase to some degree over the medium term, it may be a number of years before they can compete with the FTSE 100’s dividend yield.
High yields
While the large-cap index may have a yield of 4% at the present time, it is possible to generate a significantly higher income return in the current year. At the time of writing, 14 shares in the FTSE 100 yield over 6%, while a further 25 have yields that are between 4% and 6%. This means that it is possible to build a portfolio with an average yield of four times the interest rate that is available on a Marcus account, with it likely to provide significantly better protection against inflation.
Growth potential
The stock market may also offer capital growth potential. In recent months, it has experienced a pullback as investors have become increasingly concerned about the outlook for the world economy, while Brexit continues to cause a degree of uncertainty. In the short run, further falls cannot be ruled out, which could wipe out all of the income return available through FTSE 100 shares.
At the same time, though, the FTSE 100 offers capital growth potential for the long run. Historically, it has delivered positive total returns which are in the high-single-digits. As such, for investors who are happy to tie their money up for a number of years, high-yield stocks could be a sound place to invest.
Outlook
While keeping some cash in reserve in case of emergency is a sound idea, an interest rate of 1.5% is likely to remain below inflation over the medium term. The FTSE 100’s dividend yield suggests that it may offer stronger total returns in the long run than a savings account.
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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.
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