UK savers with £250 a month to deploy can get 10% on their money right now. But I think there are better passive income opportunities available to investors.
By comparison, dividend stocks are riskier, more volatile, and come with lower starting yields. Despite this, they’re where I’d invest for passive income over the long term.
Cash savings
Virgin Money UK has a Regular Saver account paying 10% interest a year (calculated daily and paid quarterly). That return makes it hard to see why anyone might want to look elsewhere.
There are two limitations though. The 10% interest only applies until the end of July 2025 and it only gets paid on deposits of up to £250 a month.
That means the total interest available is just over £162. That’s an unusually good return, but it’s not going to provide a reliable income for the long term.
This is where I think dividend stocks have the advantage. While there are no guarantees, the best ones can offer a passive income stream for decades.
Dividend stocks
The big advantage of dividend shares is that they can potentially generate income indefinitely. And not only this – in some cases it can grow each year.
Take Unilever (LSE:ULVR) as an example. The stock comes with a 3.12% dividend yield – well below the 10% available on cash in the short term – but I think it could be a good choice for long-term income.
The company, whose products range from Persil to Pot Noodle, has increased its dividend by an average of 5% a year over the last decade. If this continues, the stock could be very rewarding for shareholders.
At this rate, an investment in Unilever shares could be distributing well over 10% a year on the initial stake after 30 years. And that’s without reinvesting the dividends to compound the returns.
Buy now or later?
Unilever operates in an industry where customers can easily trade up or down to other alternatives due to price, perceived quality, or any other reason. That means dividend growth’s never guaranteed.
In the short term, the choice is between getting 10% from a less risky asset or 3.15% from one that might grow. On that basis, staying with cash for a year before buying stocks looks like a good idea.
The trouble with this is that Unilever’s share prices has been showing some good momentum lately, as the new CEO’s turnaround plan takes shape. The stock’s up 19% over the last 12 months.
If this continues, the stock could have a lower dividend yield by next August – especially if interest rates keep falling. So the chance to buy Unilever shares might not be there when the time comes to invest.
Cash vs stocks
I think a cash savings account with a 10% interest rate is a hugely attractive proposition. But I don’t see it as an alternative to investing in stocks. Like a lot of investors, I have cash put aside for dealing with emergencies. And the opportunity to earn 10% on part of this is very welcome.
When it comes to passive income though, I’m looking for opportunities that have a decent chance of paying off over the long term. That’s why I’d still be buying dividend stocks even with lower yields.
This post was originally published on Motley Fool
