At the start of each month, the latest premium bond draw happens. For September, millions of household investors will check to see if they’ve won big. If not, then they’ll still be hoping for some kind of income from the bonds held. This can be as small as £25. The premium bond draw is akin to playing the lottery, with the key difference that your investment doesn’t decrease in value. Some investors have more certainty of income from FTSE 100 stocks that pay out dividends. So which is better?
Worth the time?
One argument made in favour of premium bonds is that investors get a shot every month to generate income. For a dividend-paying stock, these usually get paid annually or semi-annually. So from this perspective, the chances of regular income is higher with premium bonds. You also have the upside of generating out-sized income from the monthly draw. An investment of £1,000 could see you get paid £10,000 from a monthly prize. This alone would be a yield of 1,000%!
The opportunities are higher with bonds, but the certainty is lower. Provided the stock I invest in keeps the promise and does pay out a dividend, I can work out both my income and my dividend yield. For example, if I bought stock in Coca-Cola HBC at the current share price and the historical dividend remains the same, my yield is 2.76%. I like this certainty, as do many other investors. True, I don’t have the huge income potential that I do from winning a large prize on the bonds. But I’d prefer to be able to plan on known eventualities instead of wishful thinking!
Capital gains
The second reason I prefer FTSE 100 dividend stocks over premium bonds is for the potential to gain on the underlying share price. The capital you invest into premium bonds remains the same over time. You’re unlikely to lose it (as it’s backed by the government) but at the same time you’re not going to see capital appreciation.
With stocks, it’s a different story. You do take on the added risk of the share price falling, but you have good upside potential. This adds a boosted overall yield in the long run. For example, let’s say you invested into Coca-Cola HBC five years ago. On top of the dividend income you’d have received, you’d also have made around 50% on the rising share price. This really makes a difference in the long run for the overall return of the investment.
Premium bond draw summary
Premium bonds aren’t an investment that I’d steer clear of completely. If you were considering a Cash ISA versus premium bonds, I’d go for premium bonds. It’s only when you weigh up an investment in premium bonds against FTSE 100 dividend-paying stocks that I’d go for the stocks. The higher certainty of income along with the potential for capital gains makes it more attractive in my opinion.
