FTSE dividend shares offer some incredible yields right now. Solid, defensive businesses like GlaxoSmithKline and Unilever currently pay income of around 5% a year. Insurer Aviva pays 5.22%, while one of my favourite FTSE dividend shares, Legal & General Group, pays an incredible 6.71%. These are just the first that spring to mind. Some stocks yield 8%, or more. I’m looking at you Imperial Brands Group (8.68%), and you Persimmon (10.34%).
I’m buying FTSE dividend shares
At the same time, the returns on cash are low. Even though the Bank of England has hiked base rates for three months in a row, Halifax, Lloyds, NatWest, Bank of Scotland and Santander are still paying just 0.01% on easy access.
Savers now have an estimated £250bn sitting in savings accounts that pay no interest, Hargreaves Lansdown figures show. I believe it makes sense to have a bit of rainy-day cash on instant access, to fund emergencies such as a broken boiler or car repairs.
Yet I’m not leaving my long-term wealth on deposit, because I feel it can work so much harder elsewhere. Investing in FTSE dividend shares is riskier than leaving money in the bank. Stock markets can go up and down (in fact, they do it all the time). They can crash (they do that pretty regularly too). Individual companies can run into trouble. Profits can plunge. Management may cut dividends. Even apparently big, solid firms can go out of business.
Cash is a safe haven, but with inflation set to hit 8% later this year, and possibly even 10%, it also carries risk. If I leave money sitting in a savings account paying 0.01%, the value of my money will plunge in real terms. Inflation is called the silent assassin because you do not see it at work. If I have £10,000 in the bank earning zero interest and look at it one year later, my statement will still say £10,000. But if inflation averaged 10% in that time, it would only buy me £9,000 worth of goods and services. So I’m relying on FTSE dividend shares to help my money maintain its value as prices rise.
I’m facing down the inflation threat
Right now, FTSE 100 dividend shares offer an average yield of 3.22%. Better still, that is a rising income, because most companies aim to increase their dividend payouts over time. I also have instant access to my money.
There is another reason why I favour FTSE dividend shares. I should get capital growth as well, if their share prices rise. That is far from guaranteed, of course. My stock picks may fall in value, possibly dramatically. Some may never recover.
Yet I limit my exposure by buying a spread of 15-20 FTSE dividend shares and hope my winners outweigh my losers. And I will keep reinvesting my dividends for growth, turbo-charging my returns. I’m hoping they will protect me against the growing inflation menace.
The post I’m not accepting 0.01% on cash when FTSE dividend shares pay 6% or 7% appeared first on The Motley Fool UK.
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Harvey Jones doesn’t hold any of the shares mentioned in this article. The Motley Fool UK has recommended GlaxoSmithKline, Imperial Brands, Lloyds Banking Group, 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.
