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Forget NS&I Premium Bonds and Income Bonds. I’d buy high-yield UK shares for a passive income

Peter Stephens
·3-min read

The stock market crash means there are a large number of high-yield UK shares available through which to make a passive income.

In many cases, their dividend yields are many times greater than the income returns on offer from other sources, such as NS&I Premium Bonds and Income Bonds.

Therefore, buying a diverse range of UK shares with attractive and sustainable dividend yields today could lead to an impressive income return in the long run.

Buying high-yield UK shares for a passive income

The passive income returns on high-yield UK shares are significantly higher than those available from NS&I Premium Bonds or Income Bonds. There are a couple of reasons for this.

First, the stock market crash has left investor sentiment towards many FTSE 100 and FTSE 250 shares at low levels. Investors are understandably concerned about the prospects for the economy, which could have a negative impact on the stock market’s performance. Therefore, even where a company has affordable dividends set to rise in the coming years, its low share price may mean it offers a high yield relative to the historic levels of UK shares.

Second, low interest rates mean the passive income available from NS&I Premium Bonds and Income Bonds is relatively low. It may even become more disappointing over the medium term. That’s because a weak economic outlook forces policymakers to extend the current loose monetary policy. This could make a portfolio of high-yield UK shares even more attractive over the long run.

Building a sustainable income from FTSE 100 and FTSE 250 shares

Of course, there’s little to be gained in buying high-yield UK shares when the passive income they offer is unsustainable. As such, it may be prudent to check the financial standing of any business before seeking to own it for income-generating purposes.

For example, a business with a modest payout ratio, in terms of the proportion of profit paid out as a dividend being low, may be well-equipped to cope with a period of weaker financial performance. It may be able to maintain dividends through the current economic crisis.

What’s more, it may even grow them as the stock market recovers. Look out for companies with a solid market position, a sound balance sheet and a sensible strategy to navigate current economic and political uncertainties. This may mean they have a better base for generating an income than other high-yield UK shares.

Clearly, making a passive income from FTSE 100 and FTSE 250 shares is always going to be riskier than from owning NS&I Premium Bonds or Income Bonds. However, the potential returns from high-yield UK shares, as well as the opportunity to minimise risk by analysing companies before buying them, may make it a more logical approach while interest rates are at a low level.

The post Forget NS&I Premium Bonds and Income Bonds. I’d buy high-yield UK shares for a passive 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