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Forget NS&I Premium Bonds and Income Bonds. I’d buy UK shares for more than a passive income

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Low interest rates mean that making a passive income from NS&I products, such as Premium Bonds and Income Bonds, is now more difficult. Rates have been slashed across savings product ranges. This could mean dividend yields on UK shares become more attractive as the economic outlook improves.

However, British shares offer more than just a generous income return. Their cheap prices and recovery prospects mean they could produce impressive capital growth. As such, now could be the right time to buy a diverse range of FTSE 100 and FTSE 250 shares for the long run.

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Making a passive income with UK shares

It’s possible to build a diverse portfolio of UK shares that provides a significantly higher passive income than NS&I Premium Bonds or Income Bonds. Certainly, some companies are still pausing dividend payouts at the present time in response to challenging operating conditions. However, many FTSE 100 and FTSE 250 stocks are making worthwhile shareholder payouts. And they could realistically grow over the coming years.

Furthermore, the stock market crash has caused many British shares to trade at low prices. This means that their yields have risen in many cases. As such, the income returns available on a basket of UK shares are relatively high at the present time. In an era of low interest rates, this may make them even more appealing compared to bonds and savings accounts.

Capital return prospects

As well as offering a passive income, UK shares could deliver impressive capital returns. The track record of indexes such as the FTSE 100 and FTSE 250 shows that they have always fully recovered from even their very worst crises. For example, the global financial crisis wiped over 50% from the FTSE 100’s price level. It took the index a number of years to fully recover, but investors who bought while its members’ shares were trading at cheap prices benefitted from its resurgence.

Therefore, buying a range of cheap shares today could be a very profitable move over the long run. They could deliver significant price gains that complement their income potential.

Low interest rates

Making a passive income from NS&I Premium Bonds and Income Bonds may become even more difficult. There are persistent rumours about negative interest rates being used by the Bank of England to combat the UK’s weak economic performance. While cash and bonds may offer less risk than shares, their extremely low returns could make them somewhat obsolete from an income perspective.

This may make UK shares even more appealing to income investors. The end result could be rising share prices as demand for seemingly ever-shrinking income opportunities takes hold. Therefore, now could be the right time to buy a range of cheap British shares that offer high yields and growing dividends over the long run.

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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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