Savers looking to generate a passive income are having a miserable time right now. In fact, desperation is setting in as interest rates looks set to stay at near zero levels for years. Any savings account offering more than 1% is swamped by demand.
In April, National Savings & Investments (NS&I) reversed plans to cut its savings rates, and found itself offering some of the best deals on the market. The result: it attracted an incredible £14.5bn in just a few months. It has responded by slashing rates to the bone.
NS&I is cutting the rate on its market-leading easy-access Direct Saver account from 1% to a meagre 0.15%, from November 24. On the same day, its best buy Income Bonds fall from 1.15% to 0.01%. Good luck generating a passive income with NS&I.
I’m using UK shares to build a passive income
The Treasury-backed savings provider isn’t the only one slashing rates due to sky-high demand. Skipton Building Society last week pulled its Online Bonus Saver, which paid 1.2% (inflated by a 0.5% introductory bonus). This was available for just three days, before Skipton closed the offer citing “unprecedented demand”.
Hunting around for a savings account to generate some kind of passive income is a thankless task. You will have to keep on moving on, constantly, to generate any type of return. That is why I am investing for the long term in UK shares instead.
This has also been a tough year for investors looking to generate passive income courtesy of FTSE 100 dividends. More than a third of companies listed on the index have scrapped or suspended shareholder payouts due to the pandemic.
However, many continue to offer investors a high and rising income. Incredibly, asset manager Standard Life Aberdeen has stuck by its dividend and now yields 10.05%. Even if it is trimmed, you should still get a great passive income. The same goes for Legal & General Group, which yields 9.86%.
Imagine if a savings account offered that kind of return. It would be swamped by savers demanding a piece of the action.
Two more FTSE 100 income heroes
Pharmaceuticals firm GlaxoSmithKline is another company to stand by its dividend in recent days, and it currently yields 5.41%. Spirits giant Diageo has also said it will continue to reward loyal shareholders. Its dividend yield is lower at 2.8%, but management has a progressive attitude and the payout tends to rise year after year.
I’m investing around £100 a week right now, turning stock market volatility to my advantage. If share prices fall, my regular payment picks up more stock. That will generate more dividends, which I will reinvest back into my portfolio for growth.
Later, when I retire, I will rely on it to deliver the passive income I need. UK shares may be riskier than cash, but if you invest for the long term, short-term volatility becomes a non-issue.
The paltry returns you get from cash and NS&I are not enough to live on. With luck, dividends should deliver the passive income you need.
Here's where I'd start.
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