The derisory interest rates of around 1.5% that many cash ISAs pay won’t help me to build up a decent pot of money for retirement. The rate of inflation runs higher than that, so the interest I’d receive from my ISA won’t keep up with the declining spending power of my money.
In other words, if I save in a cash ISA, I’m going to lose money after adjusting for the eroding effect of inflation.
Why shares could be better
So instead of saving cash, I’d rather invest in dividend-paying shares. Dividends from many listed companies are much higher than the rates paid by cash ISA accounts and, on top of that, many firms raise their dividend payments each year too – you don’t get that benefit from a cash ISA!
One example of a stock that looks attractive to me right now is education products and services supplier RM (LSE: RM). At the recent share price of 240p, the dividend yields around 3.2%, which knocks the spots of any cash ISA. But the best bit is that the dividend payment has increased by more than 120% over the past six years. If that growth in the dividend continues, you could earn a handsome return by investing in the company’s shares from the dividend payments alone.
However, it gets even better. A rising dividend like that tends to take a share price up with it to reflect the value building in the underlying business, and RM’s share price has risen by more than 200% over the previous six years as the dividend has been growing. So, if you’d invested in RM six years ago you’d have more than three times the money you originally invested by now.
It sounds easy, doesn’t it? But there is a catch. Investing in shares carries more risk than investing in cash accounts. There is the risk that the underlying business behind a share may not go on to perform as well as we expect it to. You could even lose money by investing in shares if things go wrong for a company. But I reckon those who invested in RM six years ago are glad they did. I think the key to successful investing outcomes is to keep a close eye on the trading updates and financial reports that a firm issues and today’s full-year results report from RM is encouraging.
Strong trading
The company has been doing well. In the trading year to 30 November 2018, revenue rose 19% compared to the year before and adjusted diluted earnings per share shot up 22%. The balance sheet strengthened during the year with net debt falling almost 57% to £5.8m suggesting that cash is flowing into the business to back up the firm’s profits. The directors expressed their confidence in the outlook by pushing up the all-important total dividend for the year by a whopping 15%, which is a great outcome for existing investors.
The year’s progress came from organic growth and from a previous acquisition that the company integrated during the year. All three divisions made strong progress in the period and I feel confident that the company’s finances are in good shape. Meanwhile, the shares are changing hands on a forward-looking earnings multiple for 2019 of just under 10, which looks like good value to me.