Many people continue to dutifully pay into their cash ISAs. That’s despite the much-loved tax wrappers offering paltry rates of interest (1.37% at best).
To be clear, having an easily accessible cash fund is never a bad idea since it allows you to respond to setbacks such as an unexpected bill or a period of unemployment.
Beyond an emergency amount, however, hoarding cash is an easy way of damaging your wealth thanks to the eroding power of inflation. The interest you make on your savings is currently more than cancelled out by the general rise in prices (2.7% in August). In short, your cash is losing value and this looks set to continue going forward.
A far better destination, in my opinion, is a place that has been shown to give the highest returns over the long term: the stock market.
With this in mind, here are a couple of FTSE 100 beasts that, thanks to their bumper dividend yields, could make your capital work a lot harder.
Safety first
Power-provider National Grid (LSE: NG) is a favourite among income investors and for good reason. While the share price has been anything but electric over the last year — down 15% — the case for dividends remains solid.
Currently, the top-tier constituent’s shares come with a 6% yield — well over 300% more than that offered by the aforementioned best buy cash ISA.
What’s more, I can see National Grid becoming more and more popular if — and that’s a big ‘if’ — stocks continue falling over the next few months.
In times of trouble, people seek comfort. Investors are no different. Why risk your hard-earned savings on potentially risky growth plays when you can get paid to own stock in a company that, while not totally immune to economic or political setbacks (especially if Jeremy Corbyn ever gets the keys to 10 Downing Street), is less likely to be as volatile compared to the index of which it is a part?
Right now, the Grid’s shares are trading on a little less than 14 times earnings. There are other, cheaper utility stocks in the FTSE 100 offering even larger payouts (Centrica and SSE, for example) but the extent to which the latter are covered by profits is noticeably less, suggesting dividends are more likely to be chopped if trading gets worse.
Boring company, super dividends
As well as remaining positive on National Grid, I continue to regard Legal & General (LSE: LGEN) as a top dividend stock.
Regardless of whether this income is reinvested or spent (the former is usually preferable for younger investors), the £15bn cap insurer and investment manager is one of the best dividend payers in the top tier with a forecast yield of 6.7% for the current year. The bi-annual cash returns are also suitably well-covered by profits and have been consistently hiked by management for many years.
Yes, the nature of its work means that Legal & General will never set the market alight but, thanks to a growing demand for its services, it’s unlikely to be hit as hard as more cyclical stocks like house-builders or miners when the UK next falls into recession.
Even more positively, the market seems disinterested in the company and its future prospects. At just over 8 times forecast earnings, the stock is beginning to look almost criminally neglected.
