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Forget cash and NS&I! I’m building a passive income by investing £100 a week

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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.

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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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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and GlaxoSmithKline. 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.

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