Regular readers will know I’m not a fan of either Premium Bonds or Income Bonds. With Premium Bonds, there’s no regular income and the odds of winning prizes are poor. Meanwhile, Income Bonds offer low interest rates well below the rate of inflation. I see both savings products as very ineffective long-term investments.
Worryingly, both savings products are about to become even more ineffective. This week, NS&I made big changes to the returns offered from both Premium Bonds and Income Bonds. Below, I’ll discuss the recent NS&I changes. I’ll also explain how I’m targeting much higher returns than these savings products offer.
Changes to Premium Bonds and Income Bonds
With Premium Bonds, NS&I is making two key changes. They kick in in December. Firstly, it’s slashing the prize rate from 1.4% to 1%. This means less total prize money up for grabs. Secondly, it’s changing the odds of winning a prize from 24,500 to one to 34,500 to one. The estimated number of prizes is being reduced by 1m.
With Income Bonds, the interest rate offered is set to be cut from 1.16% AER to just 0.01% AER in November. This change is the biggest shock. You don’t need me to tell you that that’s a terrible interest rate. Stick £10,000 in Income Bonds for a year at that interest rate and you’re looking at interest of just £1 for the period. That won’t even buy you a cup of coffee. It’s a grim situation.
Much higher returns
If it’s long-term savings you’re looking to invest, I say forget about Premium Bonds and Income Bonds and take a look at dividend stocks. Dividends are cash payments that many companies pay to their shareholders, out of their profits, on a regular basis. Dividend stocks can be a great way to generate passive income.
Right now, plenty of well-known UK dividend stocks offer very attractive dividend yields. For example, Unilever, which owns a number of well-known brands including Dove, Ben & Jerry’s, and PG tips, currently offers a yield of about 3.3%. Major defence company BAE Systems currently offers a yield of about 5%. Meanwhile, insurance giant Legal & General offers a yield of 10%!
I’ve personally received cash dividend payments from all three of these FTSE 100 companies this month. It’s always great seeing cash payments hit my account.
I’ll point out that dividend stocks aren’t without risk. In the short term, the share prices of dividend stocks go up and down constantly. Unlike with Premium Bonds or Income Bonds, your capital’s at risk. In addition, dividends aren’t guaranteed. A company can reduce its dividend, or cancel it completely, if it wants to.
However, overall, dividends stocks can be a great way to build long-term wealth. Pick the right dividend stocks and you’ll not only enjoy regular cash payments, but you’ll enjoy share price gains too.
Compared to Premium Bonds and Income Bonds, I see dividend stocks as a no-brainer.
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Edward Sheldon owns shares in Unilever, BAE Systems, and Legal & General Group. The Motley Fool UK has recommended Unilever. 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.