Let’s look at a couple, one of which reported to the market this morning.

Cheap dividend stock

I think self-styled “purpose-led global financial technology business“ IG Group (LSE: IGG) is a great way of tackling inflation. The online trading provider has actually been a core holding in my own Stock and Shares ISA for quite a while, partly due to the cash it keeps churning out. And based on today’s half-year results, I have no concerns about this trend continuing.

This morning, IG announced a record first-half performance. Net trading revenue increased 16% to £471.9m over the six months to the end of November. Pre-tax profit also rose 8% to £245.2m. That’s pretty impressive stuff considering that markets were fairly stable over the period (IG makes money when traders try to capitalise on volatility).

As encouraging as all this is, it’s the dividends I’m after. Today, the FTSE 250 member elected to keep its interim payout steady at 12.96p per share. Assuming the full-year cash return stays at 43.2p, that means IG yields 4.9% — eight times what the best Cash ISA will give me.

Will this be sufficient to beat inflation? I don’t know. But it’s definitely worth the extra risk that comes with investing, in my opinion. This is especially true given how much (or how little) buyers are being asked to pay to acquire this quality stock.

At yesterday’s close, IG shares traded at just 11 times earnings. While the threat of further industry regulation may go some way to explaining this valuation (and dividends are never guaranteed), I’d have no issue buying more. 

Another option

Of course, IG isn’t the only cheap dividend stock out there. Shares in Polar Capital Holdings (LSE: POLR) also grab my attention.

The fund manager’s price has tumbled 19% in 2022 to date as investors have become increasingly skittish. As far as I can see, it’s nothing to do with Polar itself.

To be frank, none of this should really bother me if I’m looking to generate passive income and/or beat inflation. Analysts believe Polar will return 42.4p to investors in the current financial year. At today’s share price, that becomes a monster yield of 6.6%. 

Too good to be true? Well, the recent volatility in markets will likely mean that the mid-cap’s next set of numbers may not impress. Asset managers typically don’t do very well when clients are clamouring to withdraw their cash. 

Still, the extent to which dividends will be covered by expected profits (1.4 times) looks reasonable. Polar is not one to slash its payout anyway. Based on its track record over recent years, the company is more likely to maintain rather than reduce cash returns when times get tough.

Also changing hands for 11 times earnings, I’d be happy to add Polar Capital to my ISA today.

The post Forget the Cash ISA. I’d buy these cheap dividend stocks today! appeared first on The Twelfth Magpie.

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• This red-hot growth and dividend stock just entered the FTSE 100. Should investors consider buying it?
• 3 UK stocks to consider snapping up if the stock market crashes this month

Paul Summers owns shares in IG Group. The Motley Fool UK has recommended Polar Capital Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors. Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

They say the first step is always the hardest. Or is it? Today, I’m going to explain how anyone can build a passive income stream by setting aside just £1 a day. 

What? Just £1?!

The idea of just investing £1 a day sounds a bit ludicrous, so let me explain. The actual amount put aside every day doesn’t really matter, at least initially. It could be £2, or £5, or £10, or whatever. Obviously, £10 a day is better than £1, but that may not be doable for a lot of people.

The point is simply to make the process as free of friction as possible by keeping the amount saved small enough to not seem daunting. This increases the likelihood of it becoming a habit. And developing a good savings habit is fundamental to building wealth over the long term.

Now, investing £1 a day isn’t practical. Every three months (£91), every six months (£183) or every year (£365) makes more sense. Regardless of how regularly I buy, I’d be sure to pick a stockbroker that charges low/zero commission when I use their regular investing service. This simply invests my money automatically on a set day rather than a day of my choosing. 

Next steps

The question that now presents itself is what to buy with this money. For passive income, I’d target dividend-paying stocks. These are companies that choose to distribute a proportion of profits to investors on a quarterly, or bi-annual, basis. Positively, there’s no shortage of such businesses on the London market. 

The only issue with the above approach is that dividends are never guaranteed. So throwing all my accumulated cash into just one stock is risky.

Clearly, one solution to this would be to spread my money around a number of companies. Since we’re only starting to invest using a small amount of money, I’d probably buy a cheap exchange-traded fund that tracks an index such as the FTSE 100. Here, I’d get access to a big group of stocks in one click! Buying individual stocks is something to do further down the line.

Out of interest, the FTSE 100 yields 3.5% right now. That’s an awful lot more than the 0.67% I’d get from a Cash ISA. In fact, holding that £365 saved every year as cash is just about the worst thing I can do.

Due to the paltry amount of interest I’d be getting, it would actually lose value over time, due to inflation. Instead, I’d save my £365 into a Stocks and Shares ISA. Doing so also ensures I’ll pay no tax on the passive income I receive.

Have a little patience

I think the hardest part of growing a passive income stream is being patient. After all, investing that £365 in a FTSE 100 tracker wouldn’t generate much in the way of dividends from the off.

There are ways of turbocharging this amount, such as increasing the amount of cash per day I save once the habit has formed. I could go from £1 per day in Year One, to £2 in Year Two, to £3 in Year Three, and so on. 

Since there’s no rule to say an investor must spend the money received, I’d make a point of always reinvesting it into buying more shares to benefit from compounding. By the time I really want to use that income, I should have a far larger amount to draw on.

The post How I’d build passive income from £1 a day appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Fortunately, I think this is easily beatable. In fact, I’ve found a couple of stocks that should generate a far higher amount of cash for me.

6% dividend yield

The first high-yielding dividend stock to discuss is fund manager Jupiter Asset Management (LSE: JUP). Right now, shares in JUP can be picked up for 9 times earnings. That looks a great deal to me.

While certainly not the highest in its industry, operating margins of 27% are far better than many FTSE 250 constituents achieve. Recent years aside (due to the pandemic), the company also generates strong returns on capital — just the sort of thing I look for when selecting stocks. 

But, of course, it’s the dividends we’re interested in here. On this measure, JUP knocks it out of the park. 

Analysts currently have Jupiter returning 17.1p per share for FY21. Using the current share price, this becomes a yield of 6.5%. For perspective, that’s over 10 times what I’d get from the best instant access Cash ISA. 

It gets better. Based on earnings estimates, this cash return should also be covered 1.7 times by profit. As such, I doubt a dividend cut is on the horizon anytime soon. 

Obviously, never say never. As last year showed, firms can be quick to amend their policies on distributions in the event of severe headwinds. Stocks in the financial sector that Jupiter belongs are particularly vulnerable in this regard.

Another big yielder from the FTSE 250

A second FTSE 250 stock offering what appears to be a very enticing income stream is insurer Direct Line (LSE: DLG). It’s down to yield 24.3p per share this year. Using the current share price (305p, as I type), that gives a stonking dividend yield of 8%! 

In addition to this super payout, the company trades on what looks to be a cheap valuation (12 times earnings). That seems a whole lot more palatable compared to some stocks.

However, there are also a few things I’d need to be aware of before pulling the trigger. Unlike Jupiter, returns on capital are very low. The share price performance certainly isn’t worth shouting about either.

DLG shares are actually down 17% since 2016. Contrast this with the FTSE 250’s 34% rise and it seems clear to me that, based purely on capital gains, this stock won’t make me rich anytime soon. On top of this, dividend cover looks stretched (one times profits). Hopefully, this will prove temporary. 

Still, I’d be happier to buy DLG shares over hoarding cash. Keeping some money on the sidelines for emergencies and in preparation for the next correction/crash is never a bad thing. However, having an abundance for too long would be a spectacularly bad financial decision on my part.

Equities, while certainly higher risk, are nearly always a better option if I can ride out the inevitable waves of volatility.

All things considered, I’d be more comfortable buying more JUP than DLG for my portfolio. Then again, an 8% yield isn’t to be sniffed at, so long as I also had exposure to other sectors. 

The post 2 FTSE 250 stocks with 6%+ dividend yields! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Jupiter Fund Management. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The idea of earning something from nothing sounds pretty good to me. That, in a nutshell, is what passive income is all about.

Here’ I’m going to explain how making a small, daily sacrifice now can really pay off in time. 

Passive income: worth the sacrifice

Let’s start with the bad news. To generate passive income, I need to raise some money to begin with. On a more positive note, this doesn’t need to be very much at all. One commonly used example is shunning the shop-bought daily coffee on the way to work.

Let’s keep things simple. A £3 daily expense means £15 is spent on coffee every workweek. That becomes a staggering £780 over a year.  

Now let’s assume I invested this money in the stock market via a Stocks and Shares ISA at the end of the first year. Let’s also assume that I continued adding to this every month. For ease, we’ll go with £60 (20 coffees) per month.

Assuming an average return of 7% from the market, that grows to £11,482 after 10 years. Not bad at all. After 20 years however, this becomes £32,535. After 30 years, it’s almost £74,000! 

The calculations above are clearly just a guide. While returns from the stock market tend to be better than I can get anywhere else over the long term, they can’t be guaranteed. They could be lower… or higher. 

But what about the passive income bit?

Don’t worry – I’m getting to that. One thing worth remembering is that many investments pay dividends, usually twice a year. Indeed, over the long term, these make up a significant proportion of the total market returns.

Right now, the dividend yield from the FTSE 100 index is 3%. That’s already far more than anyone I’d get if I put my coffee savings into a Cash ISA. However, some individual companies pay a lot more. Since these would be held in a Stocks and Shares ISA, there’s no income tax to pay either! 

The only thing to mention here is that dividends can be cut in times of trouble. As such, I’d buy a selection of dividend stocks from different industries, rather than just one or two to reduce this risk. 

It’s also worth highlighting that what an investor does with this passive income can have a huge impact on performance. Assuming I have no need to spend it, my best option would be to reinvest what I receive.

There’s a simple reason for this. Throwing the money back into the market allows me to buy more shares. Owning more shares allows me to benefit to a greater extent from compounding over time. As the years pass, this could really improve my returns. 

No coffee? No problem

Obviously, this example won’t work for those who don’t need daily caffeine hits. Nonetheless, the goal here is to show how saving a few pounds every week can help generate a passive income.

I don’t need to quit coffee (that’s a big ask!). But I reckon investing the equivalent amount will seriously boost to my wealth. 

Adopting this approach won’t make me the next investor billionaire Warren Buffett, but it might provide me with a decent nest egg for retirement. 

The post How I’d earn a passive income for the price of a daily coffee appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Stocks and Shares ISAs: a good idea

A Stocks and Shares ISA allows us to avoid paying capital gains tax on profits made from our investments. Investing ‘careers’ can last for 40 or 50 years, so that could add up to hundreds of thousands of pounds.

This type of ISA also allows an investor to avoid paying income tax on any dividends they receive. Research has consistently shown that reinvesting cash returns can turbocharge returns. The less I return to the taxman, the better!

Another reason for using a Stocks and Shares ISA is that returns are likely to beat those offered by a Cash ISA. Right now, the latter offers just 0.5% at best in interest. Of course, investment returns can never be guaranteed (and building up an emergency money fund is a bad idea) but a Cash ISA won’t help me grow my investments.  

Use it or lose it

One key point about the annual ISA allowance (£20,000) is that it has a time limit. In other words, I can’t roll over any of my 2020/21 allowance into the 2021/22 tax year. If I don’t use it, I lose it. 

Given this, if I didn’t already have one, I’d open one today, rather than waiting until after 5 April. I could then invest up to £20,000 for this year and repeat that after April 5 using the next year’s allowance. 

Every little helps

Not everyone will be able to invest the full allowance. Even so, I don’t think this should put anyone off. As little as £25 per month can help in building a nest egg. An annualised return of 7% over 30 years adds up to around £28,000 by 2051 (ignoring fees). 

Returns could be lower or higher, of course. An annualised return of 10% on £25 per month over the same period brings the total ISA pot to around £49,000. Again, I’m ignoring fees.   

Stock-picking

Picking stocks for an ISA portfolio is very personal. What suits one investor may not suit another based on their financial goals and risk tolerance. I’m adopting a quality-focused approach. I’m searching for companies with low debt and for those businesses capable of growing profits and generating consistently high returns on capital employed as they go. I won’t turn down a dividend, but I’m most interested in whether these cash returns can grow year-on-year. The actual size of the dividend is of less concern to someone like me who’s not dependent on making income from my investments.

Away from the numbers, the best shares to own in an ISA will arguably be those belonging to firms offering multiple products or services. Being a market leader or operating in a space with limited competition is also desirable. As the Brexit saga has taught us, there’s a lot to be said for buying shares in companies with a global reach too.

The length of time someone remains invested is also a key factor. If I invest £25 for 40 rather than 30 years, I’ll theoretically end up with even better returns: almost £60,000 (at 7%), almost £133,000 (at 10%) and a whopping £304,000 (ar 13%).

That’s the power of compounding over time. And that’s why using my ISA allowance is a priority for me.

The post The ISA deadline is approaching! Here’s what I’d do now appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Cash ISAs: why they won’t make me money

The best instant access Cash ISA pays just 0.6%, according to Moneysavingexpert.com. That’s right – the best account! In other words, anyone with this account and £20,000 in savings (the annual ISA allowance) will make just £120 in passive income a year.

To get higher interest rates, investors need to move towards accounts that tie up their money for a certain period of time. To get a fixed 1.15% rate, for example, I’d need to lock up my cash for five years. That’s an awfully long wait for such a miserly return. 

It gets worse. The longer cash is held at these rates, the greater its value will likely be eroded by inflation over time.

Perhaps most crucially, saving into a Cash ISA isn’t even necessary for most people these days. Thanks to the Personal Savings Allowance (PSA), we can earn up to £1,000 in interest every year without needing to hand anything back to the taxman. 

I’d buy dividend stocks for passive income instead

If I’m wanting to generate truly passive income, there’s only one place I’d head. The stock market. My strategy wouldn’t be complex either. Simply buy solid dividend-paying shares and watch the money periodically drip into my account.

Of course, this simplicity doesn’t mean anything is guaranteed. Last year showed that dividends are often the first things to be sacrificed in grim times. Nevertheless, there are ways of mitigating this risk. 

Not placing all my eggs in one basket in one example. In other words, I should hold enough stocks so that the overall passive income stream isn’t too badly affected if one, two or a few stop paying out. I’d also hold stocks in different sectors, such as pharmaceuticals, utilities and consumer goods, rather than just one part of the market. 

Go for growth

The best dividend payers also tend to regularly increase the amount of cash they return to shareholders. This, for me, is more important than the size of the cash return. A company that promises a modest but growing dividend is indicative of a healthy business underlying it. One offering a high but stagnant payout is indicative of a company treading water. 

Investors don’t need to look hard for these dividend stars. In the FTSE 100, there’s consumer goods giant Unilever, drinks king Diageo and power provider National Grid. In the FTSE 250, there’s veterinary product supplier Dechra Pharmaceuticals, software provider Spectris and flow control company Rotork. Further down the market spectrum, there’s Vimto-maker Nichols and investment manager Brooks Macdonald. All these firms have consistently grown their dividends over the years. Many have hiked their payouts every year for the last decade. 

This is no accident. The best dividend payers tend to be those with strong business models and competitive advantages. They produce and/or supply goods or services that are in regular demand. Their balance sheets are robust enough to withstand the occasional, inevitable setback.

These are the stocks that are very likely to provide a better income stream than the wealth-killing Cash ISA.

The post Forget the Cash ISA. I’d invest £20k in the best UK shares for passive income appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers owns shares of Nichols. The Motley Fool UK has recommended Brooks Macdonald Group, Diageo, Nichols, Rotork, Spectris, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

To be fair, if you’re aiming to make a passive income, putting your money into a Cash ISA is probably better than stashing your hard-earned cash under the mattress. Indeed, a small interest payment is better than none. But, even the best fixed-rate Cash ISA only pays around 1.4% in interest. Moreover, you’ll likely have to tie your money up for a few years to get this rate.

I think there are better ways of generating a passive income that give you the flexibility to make the most of your wealth, whether that’s by spending it or by compounding it. 

Index tracker funds

Index funds aim to track an index, not beat it. However, because of this they’ll also likely exceed the returns from most other funds over the long run. 

Moreover, index tracker funds are boring. And this is good. Index funds trade far less frequently than other types of funds, meaning lower expenses and higher returns. And, as the aim of the fund is to mimic an index, there’s no gambling on the next big thing.

All this means you can buy an index tracker fund and forget about it, all the while knowing it’s allowing you an efficient means of earning a passive income. 

Dividend-paying stocks

Income investing is one of the simplest ways to create a passive income. Currently, with bond yields so low, dividend income on many FTSE-listed stocks exceeds the return on many bonds. Moreover, the average rate of return on many short-term bonds is lower than the annual rate of inflation. This makes dividend-paying stocks all the more attractive.

In addition, unlike even the best Cash ISA, you can choose whether to reinvest the dividends or to pocket the payments. Either way, dividends from great companies with strong balance sheets and stable cash flow is a great way to build your passive income and increase your wealth.     

Cheap shares provide for better returns than a Cash ISA

Lastly, buying shares in reputable companies and holding them for the long term is another great passive income opportunity.

Indeed, buying shares after a stock market crash means many firms are on sale. After every previous stock market crash, the Footsie has rebounded. Moreover, the average return for the FTSE 100 since its inception is around 5%, far higher than even the best Cash ISA. And lower share prices mean greater potential capital gains as the index recovers once again.     

Don’t lose your wealth by putting all your money into a Cash ISA. I think there are better ways of making a passive income from dividends and stock market returns. Moreover, they allow you to keep access to your money. And while many shares are going cheap, the best time to start is now. 

The post Warning! Cash ISAs can destroy your wealth: Here are 3 ways I’d generate a passive income appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Cash ISA rates are staying low

The fact that things are so bad out there means that we’re unlikely to see a significant rise in interest rates for a long time. Indeed, there’s a possibility that rates could even turn negative if Covid-19 continues to wreak havoc across the globe.

Negative interest rates would be good news for UK borrowers, particularly those with variable-rate mortgages linked to the base rate. As odd as it sounds, such a scenario would effectively require mortgage providers to pay interest to those they lend to.

Having said this, negative interest rates are bad news for savers because it means that they are likely to be charged by banks for holding their cash. In ‘normal’ times, the complete opposite is the case.

And it’s not as if savers were doing well beforehand. This latest setback follows years of cripplingly low rates where Cash ISAs have struggled to keep up with, let alone beat, inflation. As things stand, the best instant access account pays just 1%! This really matters because it means the value of any cash you have is barely holding (and probably losing) its value as time goes by due to the impact of inflation. 

A better strategy

As long as any high-interest debt (like credit cards) has already been eliminated, having some savings in cash is never a bad idea. It can, after all, act as a buffer for dealing with life’s little emergencies.

Personal finance gurus argue over how much we should save. For me, however, the answer is simple: hold enough to allow you to sleep at night if you lost your job that morning. And don’t bother holding it in a Cash ISA. Thanks to the £1,000 Personal Savings Allowance, a bog-standard account will do. 

When it comes to managing any remaining money you have, however, the answer for me is equally straightforward. If you haven’t done so already, open a Stocks and Shares ISA and start buying stakes in quality companies that you can hold for decades. If single company stocks feel too risky, buy funds instead.

But what if markets crash?

The possibility of another market crash as we hobble into 2021 is real. Rising infection rates around the world make lockdowns more likely. When this last happened, in March, share prices tumbled. 

So yes, there’s always a chance that buying stocks now could lead to paper losses in the near term. Then again, there could be some great vaccine-related news around the corner and we might see a stonking recovery. The point is, we just don’t know.

Over a long enough timeline, however, we do know that the probability of making money from shares is high, especially if you reinvest any dividends. The return you get is also likely to beat other asset classes over the long term. That’s a vitally important fact for all retirement-focused savers to grasp. 

Don’t fear another market crash, embrace it. And steer clear of Cash ISAs.

The post Forget the market crash and recession. It’s the Cash ISA that will kill your retirement dreams! appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The true cost of a Cash ISA

Any account that stops you from paying tax sounds great, in theory. In practice, however, the Cash ISA’s the worst destination of them all.

When even the best instant access account pays a measly 0.9%, any money stored here will barely rise in value, particularly when inflation is factored in. No, to have any chance of retiring early, your best bet is the stock market. 

Let’s say you have £10,000 and two options. Either you put this money in the Cash ISA, or you put it in a Stocks and Shares ISA. In the latter, let’s assume you invest every penny in a fund holding lots of big, global companies. It returns an average 10% per annum.

After 30 years, the first option will give you a little over £13,000. In the second, you’ll have £174,500! That’s the power of compound interest.

Sure, this example is simplified. Interest rates will vary over a 30-year period (although I can’t see them going up for a while). Average investment returns for the fund could be lower or higher and I’ve not taken into account any fees.  You also need to commit to not touching your money for a long time.

Nevertheless, this brief example shows how investing in stocks over a long timeline will give you a far better shot at retiring early than a Cash ISA ever will. 

Balancing the risk/reward ratio

Can I speed things up? Potentially, yes. The annual return in the example above is great but not exceptional. You can actually retire earlier (or retire after the same amount of time with a lot more money) if you outperform that hypothetical fund. There’s just one snag. To do this, you’ll probably need to take more risk with your capital. 

For me, this means looking lower down the market for smaller stocks that have the potential to be big winners. This requires time, energy, and, yes, a fair dollop of luck. Many minnows go bust, taking investors’ money with them.

That said, the potential returns are massive. Take a look at the share price of drug company Synairgen last week and you get an idea of just how much money can be made over a very short period of time. Now compare this to the Cash ISA interest rate.

A less-risky alternative to picking your own stocks would be to put your faith in a professional investor. To get your money’s worth, be sure to only back small-cap managers who’ve shown they can outperform the market most of the time (it’s very hard to do it every year).

If paying higher fees is something you don’t want to do, however, you could always invest in an exchange-traded fund that tracks small companies around the globe or within a specific country.  

Bottom line

Don’t dismiss early retirement as a pipe dream. Take advantage of the best wealth-generating mechanism out there: the stock market. The strategy for getting there may vary depending on how involved you want to be but even a simple approach can yield great results. 

Oh, and avoid the Cash ISA.

The post You won’t retire early with a Cash ISA. Here’s what I’d do instead appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

While the statistics show that more people saved into an ISA last year, which is a good thing, they also showed that Britons piled a ton of money into Cash ISAs while neglecting Stocks and Shares ISAs. According to HMRC, the number of people using Cash ISAs rose by 1.4m, while the number of people subscribing to Stocks and Shares ISAs fell by 450,000.

In my view, this is alarming. Ultimately, millions of Britons could be making a huge financial mistake.

Cash ISAs could hurt your wealth

The reason I say this is that the interest rates on Cash ISAs right now are shockingly low. For example, a quick Google search tells me that the best Cash ISA rate (easy-access) is just 0.9%.

If you’re earning that kind of interest rate on your savings over the long run, you’re only going to go backward financially, when you consider the effects of inflation (rising prices of goods and services over time). Earn that kind of interest rate for a decade and you’ll find that when you come to spend your money, it buys you a lot less than it does today.

Of course, cash savings are useful when it comes to saving for short-term goals. They’re also important for emergency savings. However, in the long run, cash savings are ineffective when it comes to building wealth.

“For a long-term saver, cash makes no sense,” says Holly Black, of research firm Morningstar.

Pick the right ISA

If your financial goals are more long term in nature, you’re much better off putting your money in a Stocks and Shares ISA or Lifetime ISA, in my view.

Both protect your wealth from the taxman, as the Cash ISA does, but with these two versions of the ISA, you can invest your money in a selection of wealth-building assets such as stocks, funds, exchange-traded funds (ETFs), and investment trusts.

For example, with a Stocks and Shares ISA, you can invest in a top fund such as Fundsmith Equity, which has turned £10k into £50k in less than a decade. Or you can invest in an investment trust like Scottish Mortgage, which is up more than 50% this year. Another option is to buy a low-cost ETF that tracks a major stock market index such as the FTSE 100 or the S&P 500.

Alternatively, if you fancy yourself as a stock-picker, you can put together a portfolio of stocks yourself. This strategy is slightly riskier than buying a fund or ETF but has the potential to deliver higher gains. For example, had you invested £2k in Boohoo shares five years ago, that money would now be worth over £20k.

These kinds of investments could help you build your wealth far more effectively than a Cash ISA.

Put £10,000 in a Cash ISA and earn 0.9% per year for a decade and your money will grow to £10,937. Put £10,000 in a Stocks & Shares ISA and earn 10% per year through the stock market, and your money will grow to £25,937. That’s a big difference.

If your goal is to grow your wealth, I’d pass on the Cash ISA and look at a Stocks and Shares ISA or Lifetime ISA instead.

The post Cash ISAs: millions of Britons could be making a huge financial mistake appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Edward Sheldon owns shares in Boohoo and Scottish Mortgage Investment Trust and has a position in Fundsmith Equity. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.