£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.

Should you invest £1,000 in Legal & General right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Legal & General made the list?

See the 6 stocks

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.

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

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

£20K invested in Tesla stock last April is now worth…

Despite all the bad headlines lately, Tesla stock has put in a storming performance over a 12-month timeframe. Is this…

Read more »

Investing Articles

If a 40 year old invests £600 a month in a SIPP, here’s what they could have by retirement

With no retirement savings at 40, an investor could put £600 a month into a SIPP and grow its value…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Why hasn’t its 9.9% yield boosted the Phoenix share price?

Phoenix Group has a dividend close to double digits, but saw a weak share price performance in recent years. Christopher…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

With average 10% yields, these mid-cap FTSE shares could supercharge a passive income portfolio

Some of the best passive income gems can be found on the UK's smaller indexes like the FTSE 250 and…

Read more »

A coin being dropped into a piggy bank
Investing Articles

As the Barclays share price tanks 19% in 2 days, is this a great buying opportunity?

As a trade war sends the Barclays share price into a tailspin, Andrew Mackie steps back to look at the…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

Is Fundsmith Equity still a good choice for a Stocks and Shares ISA in 2025?

Many Britons hold the Fundsmith Equity fund in their Stocks and Shares ISAs. Is this still a good move? Edward…

Read more »

Investing Articles

Nvidia stock is down 24% this year. Time to buy the dip?

Christopher Ruane has been eyeing Nvidia stock as a potential addition to his portfolio for a while. Is a recent…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Down 25% since January, this resilient dividend stock’s catching my eye

Maintaining the UK’s rail, water, and energy infrastructure isn’t the most exciting business. But it has made this a solid…

Read more »