Stop Saving and Start Buying Dividend Stocks – The Motley Fool UK


Everyone should have some money set aside for a rainy day. However, extremely low interest rates mean that it is now more difficult than ever to create a large financial nest with savings accounts alone. That’s why it might be better to stop saving and start buying dividend-paying stocks instead.

It’s time to buy dividend stocks

Since the start of the year, interest rates on savings accounts have fallen. The best easy-to-access account on the market today offers an interest rate of just 1.16%.

At that rate of return, it would take 62 years to double every £ 100 invested.

As such, dividend-paying stocks may be a better alternative. Even though many companies have reduced their distributions to investors this year, many blue chips still pay dividends.

Indeed, the average dividend yield of the FTSE 100 is always greater than 4%.

Dividend stocks are a great alternative to savings accounts because companies typically increase their payouts over time. This provides a level of protection against inflation over the long term.

For example, FTSE 100 dividend champion Hikma has increased its dividend per share by 100% over the past six years. This suggests that investors who bought the company’s stock in 2014 are expected to pocket a return of almost 7% on their investment today.

The stock also provided investors with substantial capital gains over the same period and profits rose. Cash savings accounts do not offer the same type of growth potential.

Over the past decade, the stock has returned over 12.6% annually. That’s almost 10 times higher than the best cash savings account on the market today.

Hikma is a prime example of why high-quality dividend-paying stocks may be the better option over long-term cash savings accounts. There are a handful of other stocks in the FTSE 100 that offer the same qualities as Hikma. These companies all have strong balance sheets, above-average profit margins, and competitive advantages.

Money is king

While dividend-paying stocks can help you build your financial nest egg and retire early, it is still essential to have cash reserves for emergencies.

A useful guide is to keep about three months of living expenses in cash at all times. This should be enough to cover unforeseen shocks, such as loss of income.

With that cash reserve in place, buying dividend-paying stocks could help you increase your annual income. They can also help you generate passive income, leaving more money to save. It’s another way to buy dividend-paying stocks to help you retire early.

As such, this might be a great time to ditch cash savings accounts and start buying dividend-paying stocks instead. These income games could help improve your financial situation, and many offer higher levels of income than the best savings accounts on the market today.

A premium income share that benefits from a reliable defensive business model… plus a current expected dividend yield of 4.2% to boot!

As global markets boil as the coronavirus pandemic tightens its grip, turning to equities to generate income is not as easy as it used to be …

As the realities of ‘life in lockdown’ begin to bite, many ‘must’ high yielding companies in the stock market have either taken the ax for their dividend payouts … or worse, have chosen to suspend them altogether – for the sake of it. at least in the short term.

With so many blue-chip and mid-cap companies scrambling to build up cash right now, where are we as income investors to get decent returns?

Fortunately, The Motley Fool is here to help …

Our analyst has uncovered what he believes could be a very attractive option for income-seeking investors – a company that he believes enjoys a “reliable and defensive” business model, combined with a current expected dividend yield of 4,2% to start!*

But here’s the really exciting part …

This company even took shape to overcome that sort of situation, too… having already increased sales and profits in 2008 and 2009 when the world was in the throes of the deepest economic crisis since the Great Depression.

* Please note that dividends are variable and unsecured.

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Rupert Hargreaves has no actions mentioned. Motley Fool UK recommended Hikma Pharmaceuticals. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations that we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a diverse range of information makes us better investors.


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