Saving for retirement is always an excellent idea. And especially so today as uncertainty over the State Pension increases. But if I want to create a life-changing passive income for retirement then buying value stocks is a better option.
Big returns
I’m getting an interest rate under 1.6% from my Cash ISA. Compare that with the average annual return of 8% share investors tend to make over a period of years.
Thanks to the power of compounding this difference can make a terrific impact on my overall wealth. It also means I don’t have to set aside a fortune every month to make a big return.
Just £300 invested in UK shares each month could, based on that 8% figure, make me more than £425,200 over 30 years. That’s three times more than the £138,424 I’d make if I put my money in a 1.6%-yielding Cash ISA instead.
Low valuations
Savings rates could keep rising in the near term. The Bank of England is tipped to continue hiking its benchmark rate to curb runaway inflation.
But the rates savers enjoy are unlikely to get anywhere close to the average return I can expect to make by buying UK shares. They could start falling again from 2023 too if, as expected, interest rate cuts come into effect.
I’ve mentioned that the average long-term investor tends to achieve an annual return of 8%. The good news though is that, over the past decade, this has improved to an impressive 10%. And I think I have a chance to beat even this figure following extreme stock market volatility in 2022.
You see, many top-quality UK companies still look oversold at the moment. This is reflected in the rock-bottom P/E multiples that plenty of them continue to command. This leaves them in a strong position to rise sharply when market confidence returns and stock markets begin to rally again.
Top income stocks
Moreover, this year’s share price correction has also supercharged dividend yields across the London Stock Exchange. This provides me with an opportunity to give my passive income a big boost.
The graphic above shows some top value stocks I’ve bought recently. These include income stocks with vast yields like Rio Tinto and Persimmon. These two shares still offer dividend yields of 10.7% and 15.1% respectively as we go to press.
Furthermore, I’ve also sought companies with long records of annual dividend growth like Ashtead Group and Bunzl. I’m confident these two businesses will continue hiking dividends too, thanks to their bright profits outlooks and cash-generative qualities, giving my long-term income a shot in the arm.
The bottom line
Investing in value stocks exposes an individual to more risk than a standard savings account. Stock markets can, of course, go down as well as up.
However, the big returns I can reasonably expect to make means I’m much happier using the bulk of spare cash money to buy UK shares. I think they could set me up for a lifetime of healthy passive income.