Wouldn’t it be nice if you could boost your savings without having to take on any extra work?
You’ve already earned the money you’ve saved, so why should you have to spend even more time working to get your money working for you?
The good news is, you don’t have to spend a lot of time and effort making sure that your money is producing the best return that it can. All you need to do is put aside a couple of hours every few months.
One simple trick
Dividend investing is a tried and tested method of wealth creation. Forget fixed interest savings accounts, peer-to-peer lending, or buy-to-let investing, I believe dividend investing is by far the most efficient way to get your money working hard for you.
The thing about dividends is that they are paid out of company profits and therefore tend to rise over time. Unlike interest on savings accounts, dividends are not restricted by the Bank of England. Companies can pay out as much, or as little, as they like.
At the same time, unlike buy-to-let investing, dividend investors don’t need to do any work. All you need to do is sit back and collect a regular cheque. Investing in dividends also comes with much less risk than peer-to-peer investing.
Indeed, with peer-to-peer lending, there is always a risk that you may lose some, or all, of your investment. This is also a risk when it comes to investing in dividends, although the chances that a company like Royal Dutch Shell, which is one of the world’s largest oil companies and one of the largest dividend payers in the FTSE 100, will collapse are relatively small.
How much can you make?
How much you can make depends on the route you take. Buying a dividend fund is probably the best route for inexperienced investors. Yields of up to 4% are not uncommon and, with this, you get a diversified portfolio managed by a team of experienced investment managers.
What’s more, as noted above, dividends tend to increase with company earnings. So, according to my figures, a 4% annual return on your money today could grow into an 8% return on your initial investment, assuming growth of 10% per annum.
If you decide to go down this route, I think it’s probably best to seek out investment trusts that have been awarded ‘dividend hero’ status by the Association of Investment Companies. This status is only awarded to the market’s best income funds — those investment companies that have increased their payouts consecutively each year for 20 years, or more.
Only 21 firms have achieved the accolade, including Bankers Investment Trust with 51 years of consecutive payout increases.
You can achieve a higher return by buying stocks directly. Take tobacco group Imperial Brands for example. Today, shares in this company support a dividend yield of over 7%, and management is planning to increase the distribution by at least 10% per annum for the foreseeable future.
If you are fully aware of the risks involved in buying single stocks, then this one could ignite your savings growth — that’s without even considering capital growth.
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Rupert Hargreaves owns shares in Royal Dutch Shell and Imperial Brands. The Motley Fool UK has recommended Imperial Brands. 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.