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Forget NS&I Premium Bonds and Income Bonds. I’d buy FTSE 100 shares for a 5% dividend income

Peter Stephens
·3-min read

The stock market crash means the FTSE 100 currently trades over 20% down on its 2020 starting price. While many companies have cut or postponed their dividends in response to tough operating conditions, the index continues to offer a dividend yield of around 5%.

As such, it may provide a more attractive passive income than other options, such as NS&I Premium Bonds and Income Bonds. Low interest rates mean they may fail to deliver an above-inflation return in the long run.

The FTSE 100’s passive income opportunity

As mentioned, the FTSE 100 currently has a dividend yield of around 5%. Certainly, there’s no guarantee this will be the passive income return generated over the next year. An uncertain economic outlook means that companies could decide to lower their shareholder payouts.

However, at the same time, an improving economic outlook may mean that dividends increase at a relatively fast pace.

Even with an uncertain outlook, the FTSE 100 index appears to offer a more attractive passive income opportunity than NS&I Premium Bonds and Income Bonds. Their prospects have been negatively impacted by low interest rates that could remain in place for a prolonged period of time.

The challenging economic outlook may persuade policymakers to retain a loose monetary policy for a number of months, or even years. Holders of NS&I Premium Bonds or Income Bonds may therefore find that their returns fail to offer a worthwhile passive income.

Building a portfolio of UK dividend shares

Of course, it’s possible to build a portfolio of FTSE 100 shares that offers a higher dividend yield than 5%. A number of UK shares currently trade at significantly lower prices than at the start of the year.

Therefore, their dividend yields may be relatively high – especially if they have been able to maintain their shareholder payouts. Buying a diverse range of them may offer a significantly better passive income return than that of the wider index.

Clearly, a number of FTSE 100 companies may yet cut their dividend payouts. As such, it’s important to diversify across a wide range of sectors and geographies when building a passive income portfolio.

This could certainly create a more stable income stream that is more resilient and robust during what is a tough period for the world economy. It may also lead to higher growth in dividends in the coming years, as an investor has exposure to a wider range of growth opportunities.

A long-term view

FTSE 100 shares are clearly riskier than NS&I Premium Bonds and Income Bonds. However, the difference in income returns between them at the present time may mean that UK shares offer appeal over a long-term time horizon.

They may also deliver impressive capital appreciation as the world economy recovers and investor sentiment does likewise.

The post Forget NS&I Premium Bonds and Income Bonds. I’d buy FTSE 100 shares for a 5% dividend income 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