Premium Bonds offered by National Savings and Investments (NS&I) are a popular choice for many when it comes to saving for the future. Indeed, it’s estimated that roughly 21 million people in the UK own them. The only problem is that they’re unlikely to make you rich, at least compared to a group of FTSE 100 dividend-paying stocks.
The problem with Premium Bonds
Premium Bonds aren’t hard to fathom. For every £1 you save, you’ll receive a bond. Each bond you own has an equal chance of winning a prize in a monthly draw. Just like the lottery, the more bonds you own, the better your chances. Prizes range from £25 to a staggering £1m! However, it’s important to recognise that there’s a high chance you’ll win absolutely nothing. As such, it’s probably better to look at the annual prize rate.
This has been calculated as a paltry 1.4%. In other words, you’ll receive just £1.40 for every £100 you put in. It gets worse. In September, NS&I announced that the prize rate will drop from 1.4% to 1% from December. That’s barely above inflation.
The fact that prizes are paid tax-free isn’t even an incentive anymore. After all, the Personal Savings Allowance — introduced in 2016 — means that any interest earned on savings is paid tax-free. Unless you’re earning more than £1,000 interest a year as a basic rate taxpayer, you’ll never pay a penny back.
Given the above, I’d be far more likely to put my money in another ‘national’ investment.
When it comes to defensive shares, FTSE 100 member National Grid (LSE: NG) is up there with the best of them, I feel. Regardless of whether the economy is tanking or not, we all need power. The Grid supplies gas and electricity to millions of customers every day. It’s perhaps no surprise that today’s interim numbers were, well, unsurprising.
Thanks to the coronavirus, underlying operating profit fell 12% to £1.1bn over the six months to the end of September compared to the same period in 2019. The company also had to deal with bad debts and costs relating to storms.
As you might expect from such a dependable market giant, however, there was no change to guidance on full-year earnings. Indeed, CEO John Pettigrew thinks the company is“well-positioned to manage the ongoing Covid-19 uncertainty”. Even so, the company does expect to endure a £400m hit from the pandemic.
But let’s not beat about the bush: National Grid will never double its share price overnight. The primary attraction of the shares will always be its dividends. Today, the £34bn cap revealed a 3% rise to its interim payout to 17p per share.
If analysts are correct, we should expect the FTSE 100 constituent to return 49.5p for FY21 as a whole. Based on the current share price, that gives a juicy yield of 5.2%. That’s a lot more tempting than throwing my cash at Premium Bonds.
Sadly, these dividends can never be guaranteed. Nevertheless, I find it hard to fathom a situation in which the Grid fails to pay up.
If I really want to grow my wealth, the strategy is simple: just reinvest what I receive back into the market, sit back and let compounding work its magic.
Dividend investing won’t quicken the pulse, but it’s more likely to be successful than buying Premium Bonds.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.