This weekend, Premium Bonds winning numbers for June will be announced by savings group NS&I, meaning that some bondholders could potentially win up to £1m tax-free each.
It’s certainly an exciting time of the month for bondholders – last month two different bondholders won £1m. With that kind of money being handed out on a regular basis, it’s no wonder Premium Bonds are one of the most popular savings products in the UK.
But are they a smart investment? Could they help you retire early? Let’s take a closer look at the finer details.
While Premium Bonds certainly offer attractive cash prizes, when you dig a little deeper, the appeal of the savings product decreases.
For starters, the odds of winning a prize are extremely unattractive at around 24,500 to 1 for each bond number. The odds of winning a million are significantly worse at approximately 36bn to 1.
Sure, you can boost your odds by buying more bonds, but the odds will still be stacked against you. I think it’s wise to consider this ‘top tip’ from the Money Advice Service: “Your chances of winning the top prize are very slim – most people will win smaller prizes or nothing at all.”
No regular interest
What’s even more unappealing about Premium Bonds, however, is the fact that bondholders receive NO regular income. You see, instead of paying out interest to savers on a regular basis like most cash savings products do, Premium Bonds only pay out prize money.
So, if you’re looking for regular income, they’re not a good investment. This lack of income also makes them extremely ineffective as a long-term investment as they don’t offer you the opportunity to earn compound interest (interest on your interest) and continually build up your wealth.
Overall, when you consider the unattractive odds of winning a cash prize and the lack of regular income, Premium Bonds don’t have a lot of appeal, in my view. Realistically, you’re unlikely to become wealthy by investing in them.
An easier way to build wealth
To my mind, a much easier way to build your wealth is investing in dividend stocks. These are stocks that pay out a proportion of the company’s profits in cash to shareholders on a regular basis.
Dividend investing is a ‘get-rich slowly’ strategy. You’re not going to make a million overnight investing in dividend stocks. Yet with yields of 5-6% (or even higher) available from some of the UK’s top companies, you’d be surprised at how quickly you could build up your wealth.
For example, look at the dividend yields on these three well-known FTSE 100 stocks:
Royal Dutch Shell: 5.8%
Lloyds Bank: 6.1%
Legal & General: 7.0%
The average yield between those three is a high 6.3%. In other words, if you invested £10,000 across them, you’d be looking at pocketing around £630 in cash every year. That certainly trumps the return from Premium Bonds, in my view.
Of course, stocks are higher risk than savings products because shares prices constantly fluctuate. Dividends are not guaranteed either. However, when you consider you could be earning a yield of 6% or more from dividend stocks, I think the reward is worth the risk.
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Edward Sheldon owns shares in Royal Dutch Shell, Legal & General Group and Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.