Why buy UK shares when I can get 4.5% a year in cash?

Recently, I had a chat with a well-off acquaintance who’d never, ever bought any shares. His reasoning was simple and elegant: he regarded UK shares as lottery tickets. Feeling that stocks were unlikely to make him rich, he chose to invest in property and his business instead.

This isn’t the first time I’ve heard this argument. I usually counter with this quote from renowned US investor Peter Lynch, brilliant manager of the Fidelity Magellan fund for 13 years: “Although it’s easy to forget sometimes, a share is not a lottery ticket…it’s part-ownership of a business.”

Why buy UK shares?

When done erratically, investing can feel like gambling. And in my early years as an investor, I made many dumb mistakes. But my strategy is now crystal clear: to buy and hold stakes in quality companies for the long term.

Furthermore, blue-chip FTSE 100 shares look undervalued to me, in both historical and geographical terms. Currently, the Footsie offers a (cash) dividend yield of 3.6% a year. This yield has been higher in 2024/25, but the index is nearing its record high set in early March.

However, I can earn 4.5% or more in a year by putting my money in top-paying savings accounts. Why take the risk of investing in shares, when I can earn a higher risk-free income on deposit?

Because dividends are only one component of the returns from shares.

Earnings yields, buybacks, and capital gains

At present, the FTSE 100 trades on 13.3 times its historic earnings, delivering an earnings yield of 7.5% a year. Less than half of this profit stream is paid out in dividends, with companies retaining the lion’s share to support their growth. Invested wisely, these retained earnings should help business profits grow over time.

As corporate profits rise, share prices often follow, delivering capital gains to patient shareholders. Also, many FTSE 100 firms use some spare cash to buy back their own shares. This reduces their share bases, boosting future returns for their owners.

In short, with savings accounts, I bank only one return: the interest on deposits. With shares, the combination of dividends, share buybacks, and capital gains team up to make me richer in the long run. That’s why I take the risk of buying these ‘lottery tickets’.

A FTSE 100 favourite

For example, my family portfolio owns shares in Legal & General Group (LSE: LGEN), a leading UK provider of insurance, investments, and pensions. L&G has been managing other people’s money since 1836 and today looks after £1.1trn of assets for individuals and institutions.

On Friday, 13 June, L&G shares closed at 252.2p, valuing this group at £14.6bn. They pay a juicy cash dividend to shareholders, amounting to 8.5% a year. In addition, this stock is up 13.1% over one year and 12.1% over five. Thus, owning this stock over the past half-decade would have easily beaten the returns from cash (although with far more volatility along the way).

We’ve owned this share since mid-2022. We don’t need the dividends right now, so we reinvest them into buying more shares, increasing our ownership and future returns. I see this compounding as another bonus for owning stocks.

A market crash could hit L&G’s shares, earnings, and dividends — as could falling fund fees and heightened competition for assets. But we intend to hold for the long run!

The post Why buy UK shares when I can get 4.5% a year in cash? appeared first on The Motley Fool UK.

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The Motley Fool UK has no position in any of the shares mentioned. Cliff D’Arcy has an economic interest in Legal & General Group shares. 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.