Cash ISAs can be an appealing way to boost the passive income you can get from having cash on the side. If an investor had £8k spare at the moment, would it be best to park this in a Cash ISA, or would dividend shares be a better option?
Both sides of the coin
The very best fixed rate Cash ISA I can find at the moment for the coming year is 4.8%. This would mean the £8k would grow to being worth £8,384. Unlike dividend stocks, this future value in the Cash ISA would be guaranteed, and there’s no risk of the capital fluctuating in value.
However, one point to remember is the funds are locked in for the next year, with penalties for early withdrawal. In the stock market, you can buy and sell shares every day, meaning it’s more flexible to manage. Another downside of a Cash ISA is that there’s no potential for more income than what’s agreed at the start. Therefore, some investors might decide that it’s worth taking on some more risk by putting the £8k in a dividend share instead that has a much higher yield.
For example, there are 11 stocks in the FTSE 250 with a yield of 8% or more at the moment. Sure, the share price fluctuates, so there will be a profit or loss to account for alongside the income generated. But the larger potential reward could swing the balance for investors.
Higher risk, higher reward
One example of a FTSE 250 stock that could be worth considering is Ashmore Group (LSE:ASHM). The specialist asset manager invests client money in emerging-market stocks and alternative assets, generating most of its revenue from management fees based on assets under management (AUM). Encouragingly, the latest quarterly results released last week showed a 7% rise in AUM to £40.3bn. This was made up from investment gains of £1.49bn and net inflows of £0.97bn.
The stock price is up 17% over the past year, but for income investors the dividend yield of 8.16% remains one of the biggest attractions. It has a dividend cover ratio of 1.4, meaning earnings per share do cover the current dividend (albeit by less than the benchmark 2x). Further, Ashmore’s exceptionally strong balance sheet, significant cash reserves and capital-light business model provide additional support. The company has a long record of maintaining shareholder payouts through market cycles, including keeping payments going during the pandemic, so this is a positive sign for investors.
The outlook also seems encouraging. After the strong run in developed markets like the UK and the US, more are turning to emerging markets for some high-growth alternatives to spread some risk and diversify. If investment performance remains strong, Ashmore could attract further inflows, ultimately helping to boost profits faster than costs.
One risk is that emerging markets remain volatile and are highly sensitive to geopolitical tensions. This means some might not be comfortable with buying Ashmore stock, even with the juicy yield. Yet on balance, I think it’s a stock to consider for those looking for an alternative to a Cash ISA and are comfortable with the added risk.
