Despite rising by around 10% year-to-date, the FTSE 100 still has a dividend yield of over 4%. This is towards the upper end of its historic range, and indicates that it could still offer good value for money.
Therefore, investors who are wondering where to invest their cash may be better off buying a range of dividend stocks, rather than holding it in a Cash ISA. Even though interest rates are expected to increase over the medium term, it may be many years before a Cash ISA can compete with the FTSE 100 when it comes to generating an income.
As such, now may be a good time to focus on buying FTSE 100 income shares as opposed to holding cash in an ISA.
Return potential
As well as a 4%+ dividend yield, the FTSE 100 offers capital growth potential. Certainly, there have been a number of risks facing the world economy that disrupted investor sentiment in 2018. However, there seems to be an improving growth outlook ahead for the global economy.
A key reason for this is the prospect of a slower-than-expected rise in US interest rates. There is currently minimal inflationary pressure in the US, which reduces its potential for an interest rate rise. Alongside this, economic data, such as jobs numbers and retail sales figures, have been mixed in recent months. This may lead to a continued low interest rate that boosts growth in the US and across the world economy.
Although risks, such as a full-scale trade war and Brexit, remain in place, there are a number of growth catalysts for FTSE 100 shares. Major economies such as China and the US have impressive growth outlooks that could lead to rising levels of profitability for a number of the index’s incumbents. This could allow them to offer high capital returns, as well as impressive income outlooks.
Lacklustre Cash ISA prospects
Although interest rates are expected to rise over the next few years, it is likely to take a considerable amount of time before a Cash ISA can compete with the FTSE 100 when it comes to income returns. Even then, a Cash ISA offers zero capital growth potential. For investors with a long-term view, therefore, the stock market’s total returns could be far higher than those of a Cash ISA.
Additionally, for there to be higher interest rates there may need to be inflationary pressures. This could reduce the real-terms returns of a Cash ISA even further, and make it even more difficult for savers to enjoy financial freedom in older age.
Therefore, now could be a good time to stop saving in a Cash ISA and start investing in FTSE 100 dividend shares. The index appears to offer good value for money, as well as the potential for further growth after a positive performance in 2019.