Whatever happens to interest rates, your Cash ISA will continue to disappoint

Chatting to someone the other day, I mentioned that I was sort of semi-retired – not actually drawing a pension, but not working as hard as I used to, either.
 
Instead, a lot of the day-to-day bills were paid by a monthly income that I took from a couple of ISAs.
 
The response was a combination of a scornful laugh and a look of incredulity.
 
“ISAs? You won’t get much of an income from one of those!”
 
On the contrary, I replied: I was getting a return of around 5% on my investments.

Again, there was that look of incredulity. But this time, without the scornful laugh.

On the floor

 I’m always surprised how few people are really aware of the possibilities offered by dividends, and by ISAs containing shares that pay decent and sustainable dividends.
 
Say the word ‘ISA’, and they generally think solely of Cash ISAs from banks and building societies, which for the last decade have paid truly derisory rates of interest.
 
When in early 2009 the Bank of England slashed Bank Rate three times in three successive months, it was supposed to be a temporary response to the financial crisis. Instead, the rate stayed at 0.5% until 2016 – when it was cut again, to 0.25%, in response to the post-referendum slump.
 
Eventually restored to 0.5%, it finally climbed above that level in late 2018. Now at a dizzying – yes, dizzying! – 0.75%, a cut is again on the cards as I write these words.
 
If it doesn’t come on January 30th, observers are already pencilling it in for the next time that the Bank’s Monetary Policy Committee meets to set rates. 

In real terms, you’re losing money

Clearly, it would be naïve to expect any early return to the interest rate regime of – say – the mid-2000s, when savers could actually get a positive return on the hard-earned money.
 
These days, rates are not only derisory. They are also negative, in real terms.
 
In other words, to spell it out in its starkest terms, typical bank account interest rates are dwarfed by the rate of inflation. In purchasing power terms, savers’ savings are actually shrinking.
 
Simply put, that means that what you can buy with these savings this month, is less than you could buy the month before, and less than you could buy the month before that.
 
Which for pensioners, is fairly bad news.

The dividend alternative

Yet, here’s the thing. Companies’ dividends relate to the profits that they make, and aren’t set by Bank of England policymakers.
 
(Ironically, too, when interest rates are low, many companies make higher profits – because debt is cheaper.)
 
So given a reasonable economy, companies tend to make reasonable profits, which they pay out to their shareholders in the form of dividends.

And right now, there are some tasty yields on offer – even with the Footsie at around 7600 at the time of writing.

5% plus

Among my own holdings, for instance, Royal Dutch Shell is on a yield of 6.7%, HSBC on a yield of 6.9%, mining giant BHP on a yield of 5.9%, and insurance firm Legal & General a yield of 5.5%.
 
All of those strike me as pretty dependable businesses, and those with an eye to take on a little more risk – tobacco firms BAT and Imperial Brands, maybe, or Royal Mail – will find yields that are even higher.
 
Opt for more of a ‘safety first’ stance, and there are plenty of attractive yields on offer at around the 4.5% mark – pharmaceutical giant GlaxoSmithKline, for instance, yields 4.4%. 

Time to take the plunge?

Buying a broadly-diversified clutch of such companies isn’t rocket science. These are businesses that should be big enough to withstand more than a few setbacks, and – for the most part – aren’t troubled by burdensome regulatory regimes.

Nor are brokerages expensive, or difficult to find. Buying shares, as I’ve written before, is easier than ever, and both far less expensive and far less complicated then when I started, all those years ago.
 
So if your bank or building society Cash ISA continues to disappoint, it could be time to think about a Stocks and Shares ISA instead.