The latest premium bond draw for June is out, with two more investors becoming overnight millionaires. Others may have won prizes vastly exceeding their initial investments in the bonds. As one of the most popular investments in the UK, premium bonds are an alternative way to traditional stock investing to make money.
But how does it stack up to an income-paying stock like the insurer and financial service provider M&G (LSE: MNG)? In my opinion, it’s not hard to make a choice on which I’d invest in.
A safe dividend
Over the past few months, a fair number of FTSE 100 firms have cut dividend pay outs due to the Covid-19 pandemic. This is understandable, given the need for liquidity to keep operations going. This has pushed a lot of income investors to look for new safe dividend investments for this year. That is, a payout that is likely to happen for 2020.
M&G announced a couple of months back that it intended to pay out the dividend for this year. The size of the payout would be about £410m, equating to a dividend yield of over 8%. This is high, but sustainably so. The yield is high on a relative basis because the share price is lower, rather than it being a very high absolute dividend amount.
The reason I think M&G will continue to pay out is really what the CEO recently said. He commented that “many of our shareholders are income funds or individual savers who rely on these payments for part of their retirement income”. Insurers such as M&G are not high growth companies, and so often need to use the dividend as a tool to keep investors bought in to the company.
Premium bonds vs income stocks
When I compare M&G to premium bonds, an investment in the stock appears to make more sense. If I buy M&G right now, I lock in a yield of over 8%. If I buy a premium bond right now, I don’t have any guaranteed yield. Sure, I could win £1m, but the odds of this happening are extremely small.
With premium bonds, I also don’t have any upside on the capital of my investment. With M&G, if I invest in the stock now, I have the potential to make future gains from the share price. For example, the stock is down around 40% from the crash in March. This allows me to buy in at a longer term cheap level.
Finally, premium bonds can take years in order to generate income for the investor. Income paying stocks with safe dividends mean you can get a payout within six months of your investment. This give me more confidence that during an uncertain period such as this, I can still get income payouts. So I’d look to buy into M&G right now, and stay clear of new investments into future premium bond draws.
