£5k in savings? Here’s an ISA income plan to consider

Cash ISA rates are higher before inflation, which can make them look more attractive for income.

I wouldn’t knock anyone for using one right now. It’s important to try to protect our savings against rising rates, and a Cash ISA can do just that today.

It’s a good time to remind yourself how helpful it can be to build up some savings to deal with any emergencies that may arise. And if we can stay ahead of inflation, that’s a bonus.

But Cash ISAs won’t always be attractive when Bank of England rates fall.

Long-term income

The most successful ISA investors keep part of their money in cash. But a small part is more.

That’s not surprising, according to research Barclays found that the UK stock market makes an average annual return of around 4.9% above inflation. That’s over a hundred years and more, and some years see negative results.

In 2019-2020, for example, Stocks and Shares ISAs lost an average of 13.3%. Cash ISAs come in before that year.

To maximize our long-term income prospects, we certainly need to take more risk. But a careful approach to ISA investment can help keep that risk in check.

One stock

I wouldn’t put all my money in one stock, but as an example let’s look National Grid (LSE: NG.).

I like the dividend yield, currently 5.7%. That alone is even better than today’s high Cash ISA rates, never mind any share price rises.

That being said, a dividend cannot be guaranteed in the same way that interest on capital is. But in the long run, I see National Grid’s dividend coming out well.

It’s still dangerous

We can see from that chart that there is a downside risk in the stock price. In May of this year, National Grid shocked the market by raising new capital, and that backfired.

I think National Grid could see more flexibility in the near term. But I like the look of those benefits.

I use investment trusts as a hedge against temporary shocks like this. They spread their money across a wide range of investments, reducing the risk of any particular company or sector.

I think the Association of Investment Companies’ list of Dividend Heroes offers a good one to consider. They use many different techniques, but they share one thing in common. All have raised their dividends for at least 20 consecutive years, with the leaders doing so for more than 50 years.

Diversify

Even an investment trust can have a bad year, mind. So it’s all about diversity.

If we can diversify into different businesses, we should be safer in the long run. We should still expect a downside, as in the stock market crash of 2020. But most of those who lost that year have since recovered and gone on to gain.

So, I spread my money across all equity stocks with past records of consistent annual gains. That’s what I do with any £5,000 I have to invest.

Then I add as much as I can each year.