Top Cash ISA rates are ahead of inflation, which could make them look attractive for earning passive income.
I couldn’t knock anybody for using one right now. It’s important to try to preserve the money we have against price rises, and a Cash ISA can do that today.
It’s a good time to remind ourselves how handy it can be to build up some cash savings to deal with any emergencies that might come along. And if we can stay ahead of inflation, that’s a bonus.
But Cash ISAs won’t stay as attractive when Bank of England rates come down.
Long-term income
The most successful ISA investors do keep a portion of their money in cash. But it’s a smaller proportion than most.
That’s not surprising, as a study by Barclays found that the UK stock market generates average annual returns of around 4.9% above inflation. That’s over a century and more, and some years do see poor results.
In the 2019-2020 year, for example, Stocks and Shares ISAs lost an average 13.3%. Cash ISAs came in well ahead that year.
To maximise our long-term passive income hopes, we surely need to take a bit more risk. But a careful approach to ISA investment can help keep that risk in check.
A single stock
I’d never put all my money in a single stock, but as an example let’s look at National Grid (LSE: NG.).
I like the forecast dividend yield, currently at 5.7%. That alone is better than even today’s top Cash ISA rates, never mind any possible share price rises.
Saying that, a dividend can never be guaranteed the way cash interest is. But over the long term, I can see the National Grid dividend coming out well on top.
Still risky
We can see from that chart that there’s been risk of share price falls. In May this year, National Grid shocked the market by rasing fresh capital, and that knocked it back.
I think National Grid could see some more volatility in the near term too. But I like the look of those dividends.
I use investment trusts as a hedge against short-term shocks like this. They spread their money across a wide range of investments, lowering the risk from any specific company or sector.
I think the Association of Investment Companies’ list of Dividend Heroes provides some good ones to consider. They adopt a number of different strategies, but they share one thing in common. They’ve all raised their dividends for at least 20 years in a row, with the leaders doing for more than 50 years.
Diversify
Even an investment trust can have a bad year, mind. So it’s all about diversification.
The more we can diversify across different businesses, the safer we should be in the long term. We should still expect down spells, like in the 2020 stock market crash. But most of that year’s losers have already recovered and gone on to gains.
So, spread my cash across dividend stocks with past records of consistent annual increases. That’s what I do with any £5,000 I have to invest.
And then I add as much extra as I can each year.
The post £5k in savings? Here’s a passive income ISA plan to consider appeared first on The Motley Fool UK.
But here’s another bargain investment that looks absurdly dirt-cheap:
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
More reading
3 ISA mistakes I made
Down 6% from its post-rights issue high, does National Grid’s share price look a bargain to me?
Here’s how I’m investing in dividend shares to aim for long-term wealth
Here are 2 of my favourite cheap shares to buy today
What’s going on with the National Grid share price now?
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and National Grid Plc. 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.
