£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do it. Dr James Fox explains how to invest for an income.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Interest rates are falling, and this means that those of us with money in savings accounts will start to receive less passive income. In fact, with interest rates set to fall to around 3.5% in 2026, savers will likely only receive a modest premium to the targeted rate of inflation.

Just take a look at this illustration. £20,000 in a savings account with a 3% yield generates a very limited return. Assuming a long-term average inflation rate of 2%, the net gain would be a mere 1% per year.

Source: thecalculatorsite.com

Why stocks

Investors might choose stocks for passive income over traditional savings due to the potential for higher returns and inflation protection. UK dividend stocks, particularly from established FTSE 100 companies, often provide regular payouts exceeding the low interest rates offered by savings accounts.

While savings rates can struggle to keep pace with inflation, dividend stocks can offer income growth and capital appreciation. For instance, sectors like utilities, healthcare, or consumer goods often deliver consistent dividends even during economic downturns.

Additionally, tax-efficient investment options like ISAs allow UK investors to shield dividend income from tax. Despite market volatility, long-term dividend investing offers a balance of steady income and the potential for greater financial growth than typical savings accounts.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Choosing dividend aristocrats

Investors looking for a steady passive income that grows over time will likely want to focus on buying Dividend Aristocrats. These are companies that have continually paid and grown their dividend payments over time. Of course, past performance is not reflective of future performance, but a strong track record is always appreciated.

Investors may want to consider Legal & General (LSE:LGEN). The stock stands out as a compelling Dividend Aristocrat option for investors seeking steady passive income growth, with its remarkable track record of dividend consistency, having maintained or increased its payout every year since 2010. This commitment to shareholder returns has earned Legal & General a place in the prestigious S&P UK High Yield Dividend Aristocrats Index.

There are several reasons why passive income investors pick Legal & General. One is the underlying strength of the business, with a strong solvency ratio of 223%. What’s more, Legal & General continues to offer modest earnings growth. CEO António Simões expects mid-single-digit growth year on year, indicating a stable outlook.

Looking ahead, the firm’s financial targets are encouraging. The company aims for a 6%-9% compound annual growth rate in core operating earnings per share from 2024 to 2027, with an operating return on equity of over 20%. Additionally, it anticipates generating £5bn-£6bn in cumulative Solvency II operational surplus across 2025, 2026, and 2027.

However, investors are clearly most attracted by the headline dividend yield, which could reach an impressive 9.36% in the coming year. The company’s board has announced plans to grow the dividend per share by 5% for the full year 2024, followed by 2% annual growth thereafter.

Unfortunately, investing doesn’t come without its risks. While insurers are known for strong free cash flows, Legal & General’s dividend payout appears to exceed free cash flows, potentially presenting a threat to the sustainability of the dividend in the long run.

Nonetheless, that doesn’t mean the business can’t afford the dividends, and the earnings forecast suggests the payments will become more manageable over the medium term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Here’s the dividend forecast for Rolls-Royce shares as Trump rocks the markets

Rolls-Royce shares have joined in the volatility over the past week. However, with the direction being largely downwards, the dividend…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Dividend yields of up to 11%! Here are 3 UK passive income stocks to consider

Searching for ways to supercharge your passive income with UK dividend stocks? Here are three that have grabbed our writer's…

Read more »

Young Caucasian woman at the street withdrawing money at the ATM
Investing Articles

£10,000 invested in NatWest shares at the start of 2025 is now worth…

NatWest shares surged into 2025, but things have become a little more complicated in recent weeks. Dr James Fox explores.

Read more »

Investing For Beginners

Why the FTSE 250 could outperform the FTSE 100 for the rest of the year

Jon Smith explains why the FTSE 250 could do better than its big brother when factoring in domestic exposure and…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Tariff fears send the Lloyds share price tumbling, but the dividend yield is climbing

Just when the Lloyds Banking Group share price had been rising steadily, along comes a global upheaval to knock it…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Here’s how a stock market crash could help an investor retire years early

A stock market crash can be alarming -- but for the well-prepared investor, it can also be an exceptional opportunity…

Read more »

Investing Articles

1 key fact to remember in this stock market correction

This writer takes a look at a FTSE 100 investment trust that is catching his eye after the recent massive…

Read more »

Investing Articles

I was wrong about the Tesla stock price!

Tesla stock's been affected more than most by ‘Liberation Day’. But our writer has other concerns about Elon Musk’s company.

Read more »