For many Americans savers looking to grow their savings, it’s often a straightward choice between two options: saving in a high-yield savings account or investing in dividend-paying ETFs. Both strategies generate income—but the long-term outcomes can look very different.
Let’s illustrate this by looking at two investors who put in $10,000 today.
The Safe Option: High-Yield Savings Accounts
Investor One, picking the safer option, puts in his or her $10,000 in a high-yield savings account, one that pays about 5% in annual interest, a rate which many of the best online savings account rates have been offering in recent months.
Assuming this rate is constant, compounded annually, in 10 years, our investor will have about $16,300 in the bank.
The advantage of this option is its stability. High-yield savings accounts tend to be FDIC-insured, meaning that up to $250,000 is insured.
The trade-off, however, is limited upside. The investment is predictable, but it’s also unexciting.
The Dividend ETF Strategy
Now, Investor Two may have a different strategy and decide to invest the same amount of $10,000 in dividend ETFs.
Coming to the second part of wealth creation through funds, assuming an investment in a dividend ETF earns an average annual return of 7%, the $10,000 investment could grow to about $19,700 after a decade. At an 8% return, it could grow to about $21,600.
Risk Vs Reward
The main difference between these two approaches is certainty versus growth potential.
Savings accounts offer a fixed return, while dividend ETFs offer the possibility of higher returns but with market risk.
For many investors, the best solution is not necessarily one or the other. For emergency savings, a HYSA may be appropriate, but for long-term savings, it may be better to use dividend ETFs that offer income growth potential.
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