Forget the Cash ISA! I’d buy this 5.8%-yielding passive tracker fund

This passive tracker fund offers three times more income than the best Cash ISA on the market.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

The best Cash ISA on the market offers an interest rate of just 1.31%. This dismal rate of interest doesn’t even match inflation. As a result, opening one of these tax-free wrappers could actually cost you money over the long term.

Therefore, the stock market might be a better place for your cash. Indeed, some stocks currently offer dividend yields of more than 6%.

A dividend fund

Picking dividend stocks yourself can be a tricky process. It requires plenty of time and effort, and even the professionals get it wrong occasionally.

With this being the case, it might be better to buy a dividend tracker fund instead. The great thing about these passive investments is that they do not require babysitting. All you need to do is buy the fund, sit back, and relax.

The best fund for income investors on the market at the moment is the iShares UK Dividend UCITS ETF. The goal of this ETF is simple. It seeks to track the performance of an index of 50 stocks with leading dividend yields in the FTSE 350.

To put it another way, the fund buys the 50 highest yielding stocks in the FTSE 350. This straightforward process means there’s little to no risk that the tracker will end up being high-risk, illiquid investments. There’s no chance of a Neil Woodford repeat here.

Blue-chip income

Currently, the largest holding in the fund is homebuilder Persimmon. The stock makes up around 5% of the fund. The rest of the holdings have an average price-to-earnings (P/E) ratio of 11. Meanwhile, the distribution yield of the fund is 5.8%.

Many of the companies in the portfolio would make poor investments by themselves. However, by using the basket approach, the fund can make the most of their market-beating dividend yields.

So, if you are looking for a simple way to buy a basket of cheap high-yield, blue-chip dividend stocks, the iShares UK Dividend UCITS ETF looks like an excellent investment. Also, the fund only charges an annual management fee of 0.4%. This is significantly lower than the 1% or more most other equity income funds on the market charge.

Adding to its appeal as an investment is the fact that the fund can boost returns by lending securities out to other parties. These third parties are typically short sellers who want to borrow stock to bet against companies.

Last year this increased performance by 0.04%. That’s not a huge return, but it’s better than nothing.

Reduced risk

Buying a dividend fund might seem riskier than opening a Cash ISA, but the diversification of the iShares offering helps reduce risk.

With risk spread across 50 blue-chip holdings, the chances of the fund producing a positive return over the long term are high.

By comparison, as the best Cash ISA rate on the market fails to match inflation, so it’s virtually guaranteed any money stashed away here well lose purchasing power.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Rupert Hargreaves owns no share 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.

More on Investing Articles

Investing Articles

Publish Test

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut…

Read more »

Investing Articles

JP P-Press Update Test

Read more »

Investing Articles

JP Test as Author

Test content.

Read more »

Investing Articles

KM Test Post 2

Read more »

Investing Articles

JP Test PP Status

Test content. Test headline

Read more »

Investing Articles

KM Test Post

This is my content.

Read more »

Investing Articles

JP Tag Test

Read more »

Investing Articles

Testing testing one two three

Sample paragraph here, testing, test duplicate

Read more »