From my research, investors can currently achieve 4.51% with an easy-access Cash ISA. By contrast, the FTSE 100 average dividend yield is 3.02%.
For income investors with a patient mindset, compounding gains over several years helps to build wealth. But which avenue can reach this goal faster?
Weighing up both sides
With a competitive interest rate, a Cash ISA offers a predictable return that isn’t at the mercy of market swings or dividend cuts. Further, the interest paid isn’t subject to tax. In volatile periods, like we saw earlier this year in the stock market, the stability of not having capital at risk can be very appealing.
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But let’s not get carried away. Even though the index average might be lower than some Cash ISA’s, a carefully picked selection of stocks from the index can raise the yield for a portfolio comfortably above 6%. Therefore, that provides a better return than the ISA, even with the added risk.
The other powerful argument for stocks is that the dividend yield isn’t the only way to build wealth. Dividend shares offer not just income, but growth. Many companies increase their payouts over time and, crucially, their share prices can rise as well. Reinvested dividends can supercharge compounding in a way cash simply can’t replicate. For money in a Cash ISA, it doesn’t have any potential to enjoy capital appreciation beyond the interest being paid on it.
So although there are pros and cons for both options, I think on a risk-adjusted basis, dividend shares offer a more compelling (and likely faster) way to build up wealth over time.
Dividend delight
One example of a stock that could be included in the portfolio is LondonMetric Property (LSE:LMP). The share price is flat over the past year, with a dividend yield of 6.51%. Interestingly, the yield hasn’t fallen below 5.5% at all over the last year.
It’s a real estate investment trust (REIT) that owns a large portfolio of UK properties, particularly in high-demand areas like logistics warehouses and healthcare sites. These are typically let out on long-term leases, where tenants cover most property costs. That creates a steady, predictable stream of rental income.
It’s that income model that helps explain why the dividend looks relatively sustainable. The company boasts high occupancy (around 98%) and long leases averaging well over a decade, locking in cash flow visibility. On top of that, net rental income has been growing strongly, jumping to more than £450m for the full year ended in March.
Encouragingly, the dividend’s been increased for more than a decade, with another rise expected this year. Even better, earnings broadly cover the payout, suggesting it isn’t being funded unsustainably through debt.
Looking ahead, the outlook appears positive. Demand for logistics properties remains strong, and is an area I expect will keep growing. In terms of risks, it’s highly sensitive to interest rates. When rates rise, borrowing costs increase and property valuations can come under pressure.
Even with that, I believe it’s a good stock to consider as part of a dividend investor’s strategy.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended LondonMetric Property Plc. 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.
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