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Forget Cash ISAs and Premium Bonds: I’d buy the FTSE 100 for a passive income

Cash ISAs and Premium Bonds are a great way to save money for a rainy day. However, over the past few years, the interest rates on these products have plunged.

Indeed, at the time of writing, the best flexible Cash ISA rate on the market is just 1.25%. Meanwhile, the annual prize rate for Premium Bonds is only 1.4%. It’s hardly worth getting excited about these minuscule rates of interest.

And, with that being the case, owning the FTSE 100 could be a better option for your money over the long term.

Buying the FTSE 100 for income

There are three main reasons why the index might be a better investment than Cash ISAs and Premium Bonds over the long run.

First off, FTSE 100 stocks currently support a higher level of income. The UK’s leading blue-chip stock index has a dividend yield of 5.3% right now. That’s several times higher than the rate offered by the best Cash ISA on the market.

In addition to this higher level of income, the FTSE 100’s dividend yield has more growth potential over the long term. The Bank of England base rate determines interest rates for Cash ISAs and Premium Bonds.

On the other hand, company profits determine the index’s dividend yield. These tend to rise over the long term. As we’ve seen over the past 10 years, the same isn’t true of interest rates.

A third reason why the FTSE 100 could be a better income investment than Cash ISAs and Premium Bonds is capital growth. As well as the income stream from the index, investors may also see the value of their investments rise.

It’s not very easy to tell what sort of return the FTSE 100 could produce over the long term. However, as a guide, over the past 35 years, the FTSE 100 has returned around 7% per annum. That rate of return would be enough to double your investment every decade.

The better buy 

Those are the reasons why the FTSE 100 could be a better investment for a passive income than Cash ISAs and Premium Bonds. While these two cash products have their uses, for investors who’re serious about generating a passive income, the FTSE 100 has much better income credentials. The potential for capital gains is also highly appealing.

It’s quite simple to track the performance of the FTSE 100. All you need to do is buy a low-cost tracker fund, sit back, and relax. The fund’s managers will then do all the hard work for you.

Investors can also own a tracker fund in a Stocks and Shares ISA. This means there’ll be no further tax to pay on income or capital gains earned from the FTSE 100 tracker investment.

So, if you’re serious about generating a passive income, it’s worth taking a closer look at the FTSE 100.

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Rupert Hargreaves has no position in any of the shares mentioned. 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.