Everyone should have some money put aside for a rainy day. However, ultra-low interest rates mean it’s now harder than ever to build a large financial nest egg with savings accounts alone. That’s why it may be better to stop saving and start buying dividend stocks instead.
Time to buy dividend stocks Since the beginning of the year, interest rates on savings accounts have plunged. The best easy access account on the market at the moment offers an interest rate of just 1.16%.
At this rate of return, it would take a staggering 62 years to double every £100 invested.
As such, dividend stocks may be a better alternative. Even though many companies have cut their distributions to investors this year, many blue-chips still offer a dividend.
Indeed, the FTSE 100’s average dividend yield still stands at over 4%.
Dividend stocks are an excellent alternative to savings accounts because companies generally increase their payouts over time. This provides a level of inflation protection over the long run.
For example, FTSE 100 dividend champion Hikma has increased its per share dividend by 100% over the past six years. This suggests that investors who bought the company’s shares in 2014 should be pocketing a yield of nearly 7% on their investment today.
The stock has also provided investors with substantial capital gains over the same period, and profits have expanded. Cash savings accounts do not offer the same kind of growth potential.
Over the past decade, the stock has returned more than 12.6% per annum. That’s nearly 10 times higher than the best cash savings account on the market today.
Hikma is an excellent example of why high-quality dividend stocks may be the better option over cash savings accounts in the long run. There are a handful of other stocks in the FTSE 100 that offer the same qualities as Hikma. These companies all have strong balance sheets, better-than-average profit margins and competitive advantages.
Cash is king While dividend stocks could help you build your financial nest egg and retire early, it’s still essential to have some cash reserves for emergencies.
A useful guide is to keep around three months’ living expenses in cash at all times. This should be enough to cover any unforeseen shocks, such as loss of income.
With this cash reserve in place, buying dividend stocks could help you boost your annual income. They may also help you generate a passive income, leaving more money for saving. This is another way buying dividend stocks could help you retire early.
As such, now could be a great time to ditch cash savings accounts and start buying dividend stocks instead. These income plays could help improve your financial situation, and many offer higher levels of income than the top savings accounts on the market today.
The post Why I’d stop saving and start buying dividend stocks appeared first on The Motley Fool UK.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals (LON:HIK). 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 2020