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Why I’d stop saving and start investing in UK shares to make a passive income

Peter Stephens | Friday, 2nd October, 2020

Image source: Getty Images

The recent volatility among many UK shares could cause some investors to sell them and hold cash in search of a passive income. However, the returns available on cash could prove to be very disappointing over the long run. Moreover, low stock prices may mean the yields available on British stocks are very attractive.

As such, now could be the right time to stop saving and start investing in a diverse range of dividend shares.

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Making a passive income from cash savings

Falling interest rates mean many savings accounts currently offer scant opportunity to make a worthwhile passive income. In fact, obtaining an interest rate significantly above 1% on easy access savings is very challenging. As such, savers will need to have a vast sum of capital available to make even a modest income return from their cash savings.

Looking ahead, things could get even worse for savers. There’s continued talk among policymakers about the prospect of negative interest rates. While banks may never end up charging customers to hold cash savings, the prospect of improving returns on cash balances seems to be low.

This could mean that your spending power is eroded over the long run. Especially if inflation increases due to the amount of monetary policy stimulus being used to combat a period of weak economic growth.

Dividend opportunities among UK shares

Of course, making a passive income from UK shares has been challenging this year. Many FTSE 100 and FTSE 250 companies have decided to cut their dividends in response to uncertain operating conditions.

However, it’s still possible to build a diverse portfolio of income shares that offer high yields in many cases. The stock market crash has caused many UK shares to trade at low prices due to the risks they face. This means that, in some cases, their yields have risen to exceptionally high levels. Compared to other assets, such as cash, they offer returns that are many times higher.

Furthermore, dividend growth prospects could mean that making a passive income becomes easier for investors in British stocks. The past performance of the economy shows it’s likely to recover from its present challenges to post positive growth. This may allow investors in dividend stocks to enjoy an inflation-beating rise in their incomes over the coming years.

Risk reduction

Using UK shares to make a passive income is clearly riskier than holding cash. However, those risks can be reduced by holding a diverse range of companies in your portfolio. Although they are likely to experience uncertain trading conditions for many months, their potential income returns appear to be significantly more attractive than holding cash.

Therefore, buying stocks could prove to be a sound move over the long run for income-seeking investors.

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Important information and risk disclaimer: The value of shares and any income produced can fall as well as rise, and you may get back less than you invest. Exchange rate fluctuations can reduce the sterling value of any overseas holdings.

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RISK WARNINGS AND DISCLAIMERS

The value of stocks and shares and any dividend income, may fall as well as rise, and is not guaranteed so you may get back less than you invested. You should not invest any money you can’t afford to lose and should not rely on any dividend income to meet your living expenses. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, administrative costs, withholding taxes, different accounting and reporting standards, may have other tax implications, and may not provide the same, or any, regulatory protection. Exchange rate charges may adversely affect the value of shares in sterling terms, and you could lose money in sterling even if the stock rises in the currency of origin. Any performance statistics that do not adjust for exchange rate changes are likely to result in inaccurate real returns for sterling-based UK investors.

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