Move over premium bonds: here’s how to earn passive income on the stock market
For years, premium bonds have been a popular choice for UK savers seeking minimal risk. However, the passive income available from high-yield dividend stocks should be so much more appealing. Here’s why I think Britons need to look more carefully at investing, and put premium bonds to the back of their minds.
Premium bonds currently offer an annual ‘prize fund rate’ of roughly 3.8%. This figure is not a guaranteed yield, as it reflects an average return based on luck in monthly draws. Importantly, most bondholders will earn less, and many never win at all.
In contrast, several prominent UK stocks are delivering dividend yields that far exceed this rate.
| Stock | Forward dividend yield (%) |
|---|---|
| Legal & General | 8.4% |
| Phoenix Group | 9% |
| Lloyds | 4.5% |
| Greggs | 3.9% |
| Premium Bonds | 3.8% (not guaranteed) |
While dividends are by no means guaranteed, these payments are arguably more predictable that the ‘luck’ of a premium bond prize. They are also typically paid biannually or quarterly, providing regular cash flow.
The best FTSE income stocks are clearly outpacing premium bonds on yield. For those willing to accept modest stock market risk, dividends from companies like Legal & General or Phoenix Group can offer an inflation-beating source of passive income.
And in the current market, I’d suggest it’s entirely possible to create a portfolio of 10 stocks with an average yield of 6%. And the portfolio would be composed of dividend-paying stocks that appear sustainable.
All these factors make me think premium bonds look less and less attractive by comparison. And it’s even more compelling if an investor wishes to compound for wealth accumulation.
For example, £10,000 would grow to £31,000 after 30 years in premium bonds, while that figure would be £60,000 in investments returning 6% per year. More seasoned investors averaging 12% per annum could turn £10,000 into £359,000.
One investment to consider
Yü Group (LSE:YU) is an AIM-listed stock that stands out for dividend investors. The forecast dividend yield is 4.6% and is expected to exceed 5% by 2027, based on strong projected increases in payouts — from 60p per share in 2024 to 95p by 2027. Buying Yü Group shares now would allow an investor to lock in today’s attractive yield and benefit directly from anticipated dividend hikes over the coming years.
A crucial strength is Yü’s balance sheet. The group holds £80.2m in net cash, equivalent to 30% of its £273m market capitalisation. This significant cash buffer not only underpins dividend sustainability, but also signals further potential for increases, especially given a conservative payout ratio of about 33%.
Moreover, the core business benefits from sector trends such as smart metering rollouts and demand for green energy. It’s a licensed supplier of electricity, gas, and water to UK firms.
A key risk to monitor is volatility in wholesale energy prices, which, despite effective hedging, could impact long-term margins. Still, the company’s earnings strength and balance sheet resilience make its rising dividends especially compelling for long-term investors.
I’ve got it on my watchlist. It may be worth broader consideration.
The post Move over premium bonds: here’s how to earn passive income on the stock market appeared first on The Motley Fool UK.
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James Fox has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Greggs Plc and Lloyds Banking Group Plc. 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.
