Interest rates are rising, causing share prices to fall. So should I be looking to put my money in a savings account with a high yield right now?
At the moment, there’s an instant access savings account with a 2.75% interest rate and a five-year fixed account offering 5% interest. Those are pretty good rates – much higher than anything on offer a year ago.
Despite this, I’m not looking to invest my money in high-yield savings accounts at the moment. The reason is straightforward – I think there are better investment opportunities for me elsewhere.
Stocks
I think that I can get a better return on my money by investing in UK businesses via the stock market. Even given the risk involved with owning stocks, this looks like a much more attractive opportunity to me.
For example, I could buy a stake in British American Tobacco, which currently has a share price of £32.89. The company currently pays out £2.17 of its earnings to its shareholders each year.
That’s an annual return of around 6.6%. Of course, the company’s profits might drop and it could cut or stop paying its dividend, but the return on offer at the moment is significantly higher than the interest rate on a five-year savings account.
Alternatively, I could buy shares in Lloyd’s Banking Group. Last year, the company paid out around 2.13p in dividends to its shareholders.
With shares in the company priced at 42p right now, that’s a return of 5.7%. Rising interest rates could lead to difficulties with mortgages in the UK, but I think that Lloyds looks well-placed to cope with this.
It seems to me that owning shares in UK businesses is likely to provide me with a better return than 5%. There’s another advantage to stocks over savings accounts, too.
With stocks, there’s the possibility for growth. Companies might make and distribute more money in the future, meaning I’ll get an even better return.
This isn’t possible with a fixed-rate savings account. For five years, the annual return is guaranteed to be no higher than 5%.
As a result, I’m not drawn to savings accounts at the moment, even with a high yield available. I’d rather invest in businesses and get a return from my share of the profits.
Emergencies
All of this comes with a very important caveat, though. I’m only looking at investing via the stock market for money that I don’t anticipate needing in the near future.
It’s hard to predict what might happen to share prices over a short period of time. So buying stocks is only for money that I’m prepared to leave for an extended period.
For my emergency fund, I’d be very happy with an instant access savings account offering a 2.75% interest rate. The same goes for money I expect to use to finance purchases in the next couple of years.
But for a five-year investment, I’d rather put my money to work buying shares in businesses. Over this period, I think I’ll comfortably outperform a fixed savings account.
