Living within your means is an excellent idea which could significantly improve your financial future. However, holding your capital in a savings account may prove to be an inefficient move. Interest rates are currently relatively low, and could fall in the coming months in response to the uncertain outlook facing the world economy.
A better destination for your capital could be dividend shares. Not only do they offer a higher income return than cash, they trade on low valuations in many cases following the stock market’s recent pullback. Through buying a diverse range of income shares, you could boost your level of passive income and improve your long-term financial prospects compared to holding cash.
With investors currently concerned about risks such as coronavirus and geopolitical challenges in countries such as the US and UK, they have become increasingly risk averse over recent months. As such, many stocks trade on low valuations which offer wide margins of safety and high dividend yields.
This provides an opportunity for individuals who are seeking to maximise the income return from their capital. In many cases, the income return on dividend shares is significantly higher than the interest rates on cash savings. Therefore, purchasing a range of dividend shares could produce an instant increase in the income you receive from your capital compared to holding cash.
Clearly, there is scope for share prices to move lower in the short run. Should the risks facing the world economy increase in size or scale, this may lead to a worsening in investor sentiment.
However, the past performance of the stock market shows that it has always recovered from its bear markets and downturns to post higher highs. For example, it recovered from the global financial crisis within a handful of years.
Therefore, investors who can look beyond the short-term prospects for the global economy and instead concentrate on the long term may be able to capitalise on current valuations. Moreover, in many cases, the valuations across a wide range of sectors suggest that investors have priced in a worsening in the global economic outlook. This may lead to favourable risk/reward ratios being on offer.
As well as high yields and the potential for capital growth, income stocks also offer dividend growth prospects. Certainly, a slowdown in the world economy’s growth rate may inhibit dividend growth across many sectors in the short run. But, the world economy has always recovered from recessions, and is likely to return to providing improving trading conditions for a range of sectors in the coming years.
Furthermore, through focusing your capital on stocks that have affordable dividends and which may be less impacted by a global slowdown than their stock market peers, you can build a relatively resilient income stream which grows over the long run. This may provide a superior return compared to cash savings which ultimately boosts your financial future.
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