How I’d invest £250 a month for long-term passive income

Right now, there are savings accounts with 10% interest rates. But Stephen Wright still prefers dividend stocks for passive income.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

UK savers with £250 a month to deploy can get 10% on their money right now. But I think there are better passive income opportunities available to investors.

By comparison, dividend stocks are riskier, more volatile, and come with lower starting yields. Despite this, they’re where I’d invest for passive income over the long term.

Cash savings

Virgin Money UK has a Regular Saver account paying 10% interest a year (calculated daily and paid quarterly). That return makes it hard to see why anyone might want to look elsewhere.

There are two limitations though. The 10% interest only applies until the end of July 2025 and it only gets paid on deposits of up to £250 a month.

That means the total interest available is just over £162. That’s an unusually good return, but it’s not going to provide a reliable income for the long term. 

This is where I think dividend stocks have the advantage. While there are no guarantees, the best ones can offer a passive income stream for decades.

Dividend stocks

The big advantage of dividend shares is that they can potentially generate income indefinitely. And not only this – in some cases it can grow each year. 

Take Unilever (LSE:ULVR) as an example. The stock comes with a 3.12% dividend yield – well below the 10% available on cash in the short term – but I think it could be a good choice for long-term income.

The company, whose products range from Persil to Pot Noodle, has increased its dividend by an average of 5% a year over the last decade. If this continues, the stock could be very rewarding for shareholders.

At this rate, an investment in Unilever shares could be distributing well over 10% a year on the initial stake after 30 years. And that’s without reinvesting the dividends to compound the returns.

Buy now or later?

Unilever operates in an industry where customers can easily trade up or down to other alternatives due to price, perceived quality, or any other reason. That means dividend growth’s never guaranteed.

In the short term, the choice is between getting 10% from a less risky asset or 3.15% from one that might grow. On that basis, staying with cash for a year before buying stocks looks like a good idea.

The trouble with this is that Unilever’s share prices has been showing some good momentum lately, as the new CEO’s turnaround plan takes shape. The stock’s up 19% over the last 12 months.

If this continues, the stock could have a lower dividend yield by next August – especially if interest rates keep falling. So the chance to buy Unilever shares might not be there when the time comes to invest.

Cash vs stocks

I think a cash savings account with a 10% interest rate is a hugely attractive proposition. But I don’t see it as an alternative to investing in stocks. Like a lot of investors, I have cash put aside for dealing with emergencies. And the opportunity to earn 10% on part of this is very welcome.

When it comes to passive income though, I’m looking for opportunities that have a decent chance of paying off over the long term. That’s why I’d still be buying dividend stocks even with lower yields.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Unilever. The Motley Fool UK has recommended Unilever. 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.

More on Investing Articles

Investing Articles

FTSE shares: a bargain way to start building wealth in 2025?

Christopher Ruane explains how, by buying FTSE 100 shares at what he thinks are bargain prices, he hopes to build…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 ISA mistakes to avoid in 2025

Our writer outlines a trio of mistakes investors can make in their ISA, to their cost, and explains why he’s…

Read more »

Older couple walking in park
Investing Articles

3 UK shares to consider as a long-term investment for retirement

Our writer identifies three UK shares with long-term growth potential he believes investors should think about holding until retirement and…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

Could this beaten-down FTSE 250 stock be on the cusp of a recovery in 2025?

After this FTSE 250 financial services stock lost another 24% of its value in 2024, Andrew Mackie sees the potential…

Read more »

The Milky Way at night, over Porthgwarra beach in Cornwall
Investing Articles

Warren Buffett says make passive income while sleeping! Here’s my plan to do so

Billionaire Warren Buffett has said many wise things over the past half a century, including a thing or two about…

Read more »

Investing Articles

£5,000 invested in this FTSE 250 company 5 years ago is now worth over £24,000

Stephen Wright looks at how a FTSE 250 food stock has more than quadrupled over the last five years –…

Read more »

Investing Articles

I asked ChatGPT to name the best FTSE 100 stock and it picked this engineering giant

Dr James Fox asked generative artificial intelligence to name the best stock to invest in on the FTSE 100 in…

Read more »

Closeup of "interest rates" text in a newspaper
Investing Articles

Why I think right now could be the best time to buy UK stocks in over 20 years

UK bond yields hitting multi-decade highs are causing UK stocks to fall. Stephen Wright thinks there are opportunities, but investors…

Read more »