Why I’d stop saving in a Cash ISA and start buying UK dividend shares today to retire early

The long-term return prospects for UK dividend shares appear to be above and beyond those of a Cash ISA, in my opinion.

Peter Stephens ❯

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 6 September, 2020 12:22 pm BST

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A significant number of UK dividend shares have reduced their shareholder payouts in 2020. As such, it has become more difficult to obtain a passive income from FTSE 100 and FTSE 250 shares.

However, the relative appeal of income stocks continues to be high. Low interest rates mean returns on a Cash ISA are desperately low, and could even fail to match inflation over the long run.

Therefore, it could be a good idea to ditch Cash ISAs and buy a variety of income stocks instead. They could improve your chances of retiring early.

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Prospects for UK dividend shares

Many UK dividend shares have cut their payouts because of the difficult financial conditions currently present. In the short run, they could deteriorate further before they improve.

Risks such as Brexit and coronavirus may cause the UK and world economies to experience a challenging period that even prompts a second market crash.

However, for investors who have a long-term time horizon, now could be the right time to buy FTSE 100 and FTSE 250 shares. In many cases, they trade on low valuations that suggest they offer capital growth opportunities.

Moreover, it’s still possible to obtain a relatively high income return from a diverse portfolio of stocks. With many companies likely to start repaying dividends, and grow them as the economy recovers, this situation may improve further in the coming years.

Prospects for Cash ISAs

While the long-term prospects for UK dividend shares are relatively positive, Cash ISA returns could prove to be very disappointing over the coming years. Interest rates are currently at their lowest-ever level. They could even move into negative territory depending on how the UK economy performs over the medium term.

As such, it’s becoming increasingly difficult for savers to obtain a positive return on their cash after inflation is factored in. Over the long run, this could lead to an erosion in spending power. This will make it more difficult to build a retirement nest egg that can provide a passive income in older age.

Starting to invest today

Online sharedealing means buying UK dividend shares is very simple and straightforward. Tax-efficient accounts, such as a Stocks and Shares ISA, can be opened in a matter of minutes.

Meanwhile, low dealing charges through services such as regular investments mean that the stock market is very accessible to all investors. Including those with relatively modest amounts to invest.

While the short-term uncertainty facing the stock market may persist for some time, over the long run the stock market is likely to significantly outperform Cash ISAs.

Therefore, now could be the right time to buy a diverse range of stocks while they appear to offer attractive valuations following the recent stock market crash.