Forget the top cash ISA rate. I’d pocket 6.7% here
A lot of cash savers spend a considerable amount of time trying to extract the most out of their money. For example, many people regularly move it between different banks in order to pick up the highest interest rates on offer at the time. Others take advantage of account signup deals that offer higher rates for a limited amount of time in order to obtain more interest.
There’s no doubt that spending time researching the top Cash ISA savings rates and moving money around can generate a little extra interest over time. However, you have to wonder whether it’s actually worth it, given how low interest rates are at the moment. For example, even if you have £50,000 cash savings to invest, the difference between earning 1.3% per year on your money and 1.4% per year amounts to just £50 after a year. That’s hardly going to help you retire early, is it?
Given that the interest rates on Cash ISAs are so low at present, I think it’s a good idea to have some money in higher-yielding investments such as shares. Shares are higher risk than cash savings, yet when you consider that you could easily pick up 6%, or higher, from the dividends on shares alone, the risk is worth the reward, in my view.
Below, I’m going to show you just how easy it is to pick up a yield of nearly 7% from the stock market right now.
High-yield mini portfolio
The table above shows a ‘mini-portfolio’ of five FTSE 100 dividend stocks. You’ll probably recognise some of the names. It includes Shell, one of the largest oil companies in the world, Lloyds Bank, one of the largest banks in the UK, healthcare giant GlaxoSmithKline, insurance and investment management firm Legal & General, and tobacco manufacturer Imperial Brands. All five of these companies are reputable, well-known names and all five are paying their shareholders huge cash dividends on a regular basis right now. As a whole, the portfolio yields an incredible 6.7%. That certainly trumps the 1.4% you can pick up from a Cash ISA. Generating a high yield from stocks really is that easy.
That said, as I mentioned earlier, shares are riskier than cash savings. While all of those companies are well-known FTSE 100 stocks, they each have their own risks. For example, Lloyds’ fortunes are tied to the health of the UK economy, so Brexit adds risks. Similarly, Shell’s profits are linked to the price of oil. If the oil price sinks, so will Shell’s profits. Because dividends are essentially a portion of a company’s profits, this means that dividend payments from stocks are never guaranteed. In reality, you’d want to spread your money out over more companies in order to lower your risk.
Furthermore, stock prices rise and fall constantly. This means that there’s a chance you may not get back what you invested. That’s certainly another risk to keep in mind. However, when you consider that stocks could pay you 7% from dividends alone, versus just 1.4% or so from a Cash ISA, allocating some money to dividends stocks is a no-brainer, in my view.
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Edward Sheldon owns shares in Royal Dutch Shell, Imperial Brands, Lloyds Banking Group, Legal & General Group and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Imperial Brands and Lloyds Banking Group. 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.