Following the financial crisis, cash has been a poor investment. For example, at present, the best returns available on a Cash ISA are around 1.5%. This is below inflation, and significantly lower than the 4.5% dividend yield of the FTSE 100.
Therefore, unless an investor has a modest time horizon, they may be better off buying a range of FTSE 100 dividend shares in order to boost their income.
Certainly, this could lead to capital loss. However, through diversification, it may be possible to limit risk while maintaining high return prospects.
Risk reduction While a Cash ISA offers no chance of capital loss, investing in any company means there’s a threat of losing some, or even all, of your capital. While this risk can never be fully removed, it can be reduced through diversification.
On a simple level, this means holding a wide range of stocks within a portfolio so that poor performance from one or a small number of them has a limited impact on the wider portfolio. In doing so, an investor would reduce company-specific risk.
Beyond holding a larger number of shares, an investor may also wish to diversify in terms of geography, as well as industry. At present, there are challenges facing the UK economy from an uncertain political and economic outlook.
This could mean now is a good time to buy a mixture of shares that operate in different regions. Likewise, owning stocks in a number of different sectors could be a means of reducing the threat of difficult operating conditions for incumbents.
Increasing returns While the FTSE 100 may have a dividend yield of 4.5%, it’s possible to obtain a significantly higher yield through selecting companies with more generous shareholder payouts. However, investors may also wish to consider stocks that are forecast to grow dividends at a fast pace over the medium term.
They may become increasingly popular among investors, with a rising dividend indicative of financial strength and the delivery of a successful strategy. As such, dividend growth stocks could deliver capital growth, as well as an impressive income return.
While the FTSE 100 may experience difficulties in the coming years after a decade-long bull market, the index has a history of generating growth over the long run. For example, it traded at just 1,000 points at inception in 1984. Today, it trades well over 7,000 points. And in decades to come, the growth potential of the world economy is likely to be reflected in an increasingly high level for the index.
Although there may be volatility along the way, individuals who wish to obtain inflation-beating returns in the long run, as well as a high income relative to other assets, may be better off with FTSE 100 dividend stocks rather than a Cash ISA.
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.
Motley Fool UK 2019