Savings accounts have become far more attractive in recent months. Last week, for example, I received an email from Chase informing me that the interest rate on my saver account will shortly rise from 1.5% to 2.1%. Naturally, I’m pretty happy about this, as it means more interest on my cash savings. Having said that, I won’t be dumping my dividend stocks and moving all my money into high interest accounts. Because with dividend stocks, I can pick up much higher yields.
Dividend stocks offer high yields
Investing in dividend stocks can be a great way to generate long-term passive income. With these stocks, investors receive regular cash payments (out of company profits) for doing absolutely nothing. And the yields can be very attractive. On the London Stock Exchange, there are many stocks that have yields of 4% and higher at present.
Some dividend stocks I own at the moment include Unilever, Tritax Big Box, and Hargreaves Lansdown. These stocks – which are all in the FTSE 350 index – currently offer prospective yields of 3.8%, 5.2%, and 5.5% respectively.
There are plenty of UK stocks that offer even higher yields. For example, British American Tobacco currently offers a yield of about 7%. Meanwhile, Legal & General, which I’ve owned in the past, currently offers a yield of about 8.5%.
It’s worth noting that a lot of dividend-paying companies continually increase their payouts. For example, Legal & General has lifted its payout by nearly 30% over the last five years. This is a major plus to owning these kinds of stocks. They can become real cash cows if they continually increase their dividend distributions.
Given the big yields on offer, and the potential for dividend growth, there’s a lot to like about dividend stocks, in my view. From a passive income point of view, they can be far more effective than savings accounts.
Savings accounts vs dividend stocks
I need to stress however, that there are some big differences between savings accounts and dividend stocks.
Savings accounts are a low-risk investment because I’m guaranteed to get all my money back. So there’s no chance of losing money (ignoring inflation).
Dividend stocks are a riskier investment because my capital is at risk. Stock prices fluctuate constantly. I can lose money if I invest in a company and its share price falls.
Long-term investments
The way I see it though, both can play an important role in my overall portfolio.
Savings accounts are ideal for my short-term savings and my emergency savings. Dividend stocks, on the other hand, are ideal for longer-term savings. They’re suited to money that is not needed in the short term and can be invested for many years.
When it comes to big yields however, dividend stocks are the clear winners. That’s why I won’t be dumping mine any time soon.