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Forget NS&I Premium Bonds and Income Bonds. I’d make a passive income with FTSE 100 shares

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Making a passive income through investing money in FTSE 100 shares may seem like a risky move to many people. The index has experienced a market crash this year and still trades over 20% down on its 2020 starting price. However, over the long run, the stock market could offer a generous and growing income return.

By contrast, NS&I Premium Bonds and Income Bonds may provide less risk in the short run. But their low returns and the prospect of low interest rates could realistically mean that investors experience a loss of spending power in the coming years.

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Making a passive income with FTSE 100 shares

Of course, making a passive income with FTSE 100 shares has become much more difficult this year. Many large-cap shares have decided to pause or even cancel their dividend payouts in response to weaker operating conditions. Therefore, there is far less choice when it comes to making an income from shares.

That said, many FTSE 100 companies continue to pay dividends. This is evidenced by the index’s dividend yield of 4.7%. As such, an investor who buys a diverse range of companies can expect to generate a yield that is significantly higher than that offered by other assets, including NS&I Premium Bonds and Income Bonds.

Furthermore, the prospects for a growing passive income from FTSE 100 shares appear to be relatively bright. The economy’s short-term outlook may be tough, but it has always recovered from its declines to post positive GDP growth. This is likely to mean that FTSE 100 companies experience improving operating conditions that allow them to pay higher dividends over the long run. This may mean that an investor’s income increases at a faster pace than inflation.

Low interest rates, potential loss of spending power

By contrast, making a passive income from NS&I Premium Bonds and Income Bonds may be a tough task. Certainly, they offer no risk of loss. While this may immediately appeal to investors after the FTSE 100’s recent decline, lower risk may also mean lower returns. In fact, it is difficult to obtain a return that is significantly higher than inflation from any cash or income bond-related product.

Interest rates may remain at low levels for a prolonged period of time. Policymakers could prioritise economic growth over inflation, which may mean that savers experience a loss of spending power. This could mean that their capital gradually goes less far in terms of the goods and services it can buy.

Therefore, while FTSE 100 shares offer a riskier option compared to NS&I Premium Bonds and Income Bonds, their significantly higher passive income prospects may make them more attractive. Through building a diverse portfolio of shares, an investor can limit risk and still benefit from a relatively high income return over the long run.

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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.

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