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Forget buy-to-let, Cash ISAs and Premium Bonds. I’d make a passive income with UK shares

Peter Stephens
·3-min read
Various denominations of notes in a pile
Various denominations of notes in a pile

Making a passive income with UK shares may be viewed as a risky strategy in the short run. Other assets such as Premium Bonds and Cash ISAs carry far less risk. Meanwhile, rising property prices may tempt some investors to engage in buy-to-let investing.

However, over the long run, the returns from British stocks could make them a more attractive income investment. By purchasing a selection of high-quality businesses with affordable dividends today, you could build a resilient income stream for the long run.

Making a passive income in 2020

This year has been a tough period for any investor who’s seeking to make a passive income. Low interest rates mean Cash ISAs now provide a very low income return compared to their historic levels. Meanwhile, Premium Bond prizes are now at relatively low levels for the same reason. This means investors would need to have a vast amount of capital held in cash or bonds to make even a modest income each month.

Similarly, the net income available from buy-to-let property may be less impressive than many investors realise. High house prices mean yields across many parts of the UK currently stand at low levels. Also, rising taxes on second homes over recent years could mean the net return available to investors is significantly lower than the gross return. In other words, once tax has been paid, the passive income left over may be relatively disappointing.

Buying UK shares for the long run

Of course, investors in UK shares have also had a troubled year when it comes to making a passive income. Some companies have cut their dividend payouts, while others could do so in the coming months due to an ongoing uncertain economic outlook. Moreover, risks such as coronavirus and Brexit could lead to paper losses for investors in the short run that negatively impact on their portfolio’s performance.

However, a wide range of British stocks continue to pay attractive dividends. Their lower prices after the market crash mean their yields are relatively high. As such, the difference in returns between them and other assets such as Cash ISAs, Premium Bonds and buy-to-let properties is relatively wide.

Through buying a diverse range of UK shares today, you could obtain a growing passive income in the long run. Many businesses have solid balance sheets. That can mean they have a high chance of surviving what could be an extended period of weak economic growth.

Furthermore, their wide economic moats may also mean they can improve their market positions to produce higher profit growth and rising dividends. Over time, their growing shareholder payouts could provide you with a worthwhile income that’s ahead of the returns on offer from other popular assets.

The post Forget buy-to-let, Cash ISAs and Premium Bonds. I’d make a passive income with UK shares appeared first on The Motley Fool UK.

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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.

Motley Fool UK 2020