The highest interest rate I could find recently for an instant access Cash ISA was 1.3%. And according to my search on moneysupermarket.com, you can get 2.15% if you are prepared to tie up your money five years. No thanks!
I reckon there’s a better deal to be had by investing in dividend-paying shares backed by good-quality businesses on the stock market. For example, GlaxoSmithKline (LSE: GSK), the FTSE 100 pharmaceutical company is paying a dividend of 4.7% right now with the share price close to 1,713p.
Defensive, cash-generating businesses
One of the great things about shares is that generally, they offer easy access to your money. If you’ve invested in the shares of a company and find you unexpectedly need your cash back, you can often sell the shares again with a few clicks of the computer mouse. However, it’s best to pick decent shares and invest with a long time horizon in mind so that you can reinvest the dividend income and allow the process of compounding to build your wealth.
The pharmaceutical sector is a good place to hunt for defensive companies with steady incoming cash flow, which is ideal for financing shareholder dividends. People tend to keep buying their medicines no matter what the general economy is doing. So, unlike more cyclical enterprises, big pharmaceutical firms tend to enjoy steady trading.
Indeed, my Foolish colleague James J McCombie recently pointed out that GlaxoSmithKline hasn’t cut its dividend in at least 15 years. But the firm has endured its challenges along the way and suffered stagnant and falling earnings because of the well-reported patent cliff that blighted the sector in the past decade.
However, I reckon the firm is set to find better times ahead, and although the dividend has been flat since 2014, we could see dividend advances in the years to come. There have been regular positive announcements from the firm this year regarding developments originating from its Research & Development (R&D) pipeline, which gives a reason for optimism, in my view.
On top of that, the company announced in August the completion of a transaction with Pfizer to form a “world-leading” consumer healthcare joint venture (JV). GlaxoSmithKline has a 68% controlling interest in the JV, which combines the two firms’ “highly complementary” portfolios of “trusted” consumer health brands, such as GSK’s Voltaren and Panadol and Pfizer’s Advil and Centrum.
Emma Walmsley, GSK’s chief executive, said in the announcement that the completion of the JV marks the beginning of “the next phase” of the “transformation” of the company. And I reckon there’s a lot going on within the business to make the shares attractive right now.
So, instead of putting my savings in a Cash ISA paying pitifully low rates of interest, I’d make regular investments into a few carefully selected shares, such as GlaxoSmithKline, alongside investments in index tracker funds, such as those following the FTSE 250 or FTSE 100.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.
Motley Fool UK 2019