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A recent study revealed that the biggest worry for UK savers with more than £5,000 to invest is “losing money”. For this reason, income stocks that pay high dividends could be a great, lower-risk alternative.
Low risk does not mean low income. Even £5,000 saved could one day generate an annual passive income of £1,903. But this would be driven by large dividends and not speculative stock gains.
The UK is also arguably the best place in the world to look for quality income shares. He FTSE 100 The average performance is almost three times the S&P 500 produce.
Cash returns
Of the 100 stocks in the index, 24 offer a dividend yield of 5% or more. These dividend payments also represent only a portion of my profitability. I expect to see stock appreciation on top of that.
But because I'm building the portfolio around income shares, much or most of my income is delivered directly to my account. I don't have to wait for stocks to increase in value to receive cash back.
Industries such as banking and energy are well prepared to pay. These are sectors where rapid growth is not on the table today. Instead, profits are sent to shareholders in the form of regular dividends, sometimes once, twice or four times a year.
The UK is home to many of these types of actions.
Tax implications
While income sharing can offer security, it also has disadvantages. The focus on steady dividends rather than rapid growth means the best stock market returns rarely come from income stocks. You may have to accept a lower rate of return, especially during bull markets.
Dividends are also heavily taxed in this country. Taxpayers with higher rates could have to send 39% of the dividends they receive to the treasury.
That's why it's crucial to buy income shares through the tax shelter of a stocks and Shares ISA. This is truly an amazing account.
The tax exemption is for life and the deposit limit of £20,000 a year is very generous, higher than the £5,000 example I'm working with.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice.
How much
So how much could my £5,000 make me? At a conservative 7% yield, I could expect my savings to grow slowly at first and then increase later. I would consider this long term, as anyone should with this type of investment.
After 30 years my £5,000 could have become £38,061. It's a decent amount of time, but it's also a decent return.
At that point, you could start collecting the money instead of reinvesting it. Let's say the dividend amount is 5%. Well, that means £1,903 would go into my account every year. Sounds pretty good to me.
