In the current low-interest-rate environment, everyone is looking for new ways to earn some extra money. Switching bank accounts in order to pick up cash bonuses is one strategy that has become popular.
The problem with switching bank accounts for cash bonuses, however, is that it’s a hassle. Even if the new bank takes care of moving over all your direct debits and standing orders, you’re probably still likely to experience issues at some stage. For example, if you have a PayPal account or you use an FX company to send money internationally, you’ll need to set up your new bank details.
In addition, there are likely to be terms and conditions associated with the cash bonus. To obtain HSBC’s current bonus of £175, for example, you’ll need to open an HSBC Advance account and pay in £1,750 per month.
Finally, I’ll point out that switching banks for cash bonuses is not a sustainable way of making extra money. It may provide you with a quick hundred quid or so, but it’s not a long-term wealth generation strategy.
Build your wealth with dividends
If you’re serious about boosting your wealth, I’d forget about short-term ‘hacks’ such as switching bank accounts, and instead, focus on proven wealth generation strategies. Investing some money in solid FTSE 100 dividend-paying companies could be a good strategy to consider.
When you invest in dividend-paying companies, you get to enjoy a share of company profits, several times per year, in the form of a cash dividend. It’s an easy way to make money – you get paid on a regular basis for doing absolutely nothing.
What’s more, some of the dividend yields offered by FTSE 100 companies are very attractive compared to bank interest rates. For example, oil giant Royal Dutch Shell currently sports a dividend yield of around 6.2%, while financial services group Legal & General offers a yield of about 6.1%. Invest £1,000 in these companies and you’re potentially looking at dividend income of over £60 per year.
A ticket to financial independence
Yet the best thing about dividend investing, in my view, is that it allows you to compound your money, which is ultimately the key to building wealth. Reinvest your dividends, and you’ll pick up more shares, which will get you more dividends in the future.
Build up a decent dividend income stream (which could be tax-free if your dividend stocks are held in an ISA), and you could potentially retire, and live off your dividend income.
Risks to consider
Of course, it’s important to be aware of the risks of investing in dividend-paying companies. In the short term, share prices rise and fall, meaning you may not get back what you invested. It’s generally recommended that you invest in shares for at least five years. Dividends are also not guaranteed.
All things considered though, dividend investing can be a great way to build up your wealth. It really is an effortless way to generate a passive income stream.
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Edward Sheldon owns shares in Royal Dutch Shell and Legal & General. The Motley Fool UK owns shares of and has recommended PayPal Holdings. The Motley Fool UK has recommended HSBC Holdings and recommends the following options: short January 2020 $97 calls on PayPal Holdings. 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.