In recent years, it hasn’t been hard to generate passive income from cash savings. With a lot of savings accounts offering high interest rates (5%+), it could be easily to generate quite a bit of cash flow.
With interest rates now falling in the UK however, the landscape’s changing. All of a sudden, the outlook for savers is a little worrying as interest rates on savings accounts are plummeting.
Less cash flow
I’ve felt the drop in interest rates myself. Up until recently, my savings account with digital bank Marcus was paying me interest of 4.75%. Now however, the rate’s 4.55% (and 0.49% of that is a bonus rate that expires in October).
Similarly, my Chase savings account was paying me interest of 4.1% until earlier this month. Now though, the rate’s only 3.85%.
Sadly, I think these rates will come down further in the near term. That’s because the Bank of England (BoE) is expected to keep cutting rates from the current level of 5%.
Most experts only expect one more cut this year. But next year’s a different story. Some analysts believe that the BoE may take rates down to around 3%. In this scenario, we could be looking at rates of around 2%-2.75% from savings accounts.
Creating passive income with stocks
The good news is that there are other ways to generate passive income. One strategy that can be very lucrative is investing in dividend stocks.
These stocks pay investors regular cash payments out of company profits. And the yields can be very attractive. On the London Stock Exchange, there are plenty of stocks that yield 6% or more. With rates on cash savings accounts coming down, that kind of yield’s attractive.
One example of a dividend stock with a high yield is banking giant HSBC (LSE: HSBA). For 2023, it rewarded shareholders with total dividends of 61 cents (its financials are in US dollars) per share. At today’s share price and GBP/USD exchange rates, that equates to a yield of 7.3%. If I was to invest £5,000 in the bank stock, I could be looking at passive income of around £370 a year.
What’s the catch?
Now, it’s worth pointing out that dividend stocks are riskier than cash savings accounts. When you buy a stock, your capital is at risk due to the fact that share prices can fall in the short term.
In HSBC’s case, the share price could experience a pull back if economic conditions deteriorated rapidly (banks’ fortunes are tied to the state of the economy). The stock could also experience a fall if there was a general market wobble.
Another thing worth mentioning is that dividends aren’t guaranteed. Companies can cut, suspend, or cancel these payouts at any time.
Over the long term however, good companies are able to increase their profits. And higher profits can lead to both share price increases and higher dividend payments for investors.
Looking at HSBC, I reckon it has the potential to increase its profits over the long term. Today, the bank’s focusing its efforts on Asia and wealth management and both of these areas have a lot of potential.
So I think the stock is worth considering as a passive income play.
This post was originally published on Motley Fool
