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UK savers with £250 a month to spend can get 10% on their money right now. But I think there are better income opportunities available to investors.
By comparison, dividend stocks are riskier, more volatile, and come with lower initial yields. Despite this, this is where I can invest income in the long run.
Saving money
Virgin Money UK has a Regular Saver account that pays 10% interest per annum (calculated daily and paid quarterly). That return makes it hard to see why anyone would want to look elsewhere.
There are two limitations though. The 10% interest only applies until the end of July 2025 and is only payable on deposits of up to £250 per month.
That means the total interest earned is just over £162. That's an unusually good return, but it won't provide reliable long-term income.
This is where I think dividend stocks are beneficial. While there are no guarantees, the best can provide a stream of income for decades.
Dividends
The biggest advantage of dividend stocks is that they can generate income indefinitely. And not only this – in some cases it can increase from year to year.
Take it Unilever (LSE:ULVR) for example. The stock comes with a dividend yield of 3.12% – well below the 10% available on cash in the short term – but I think it could be a good long-term income choice.
The company, its products range from Persil to Noodle pothas increased its dividends by an average of 5% per year for the past decade. If this continues, the stock can be very rewarding for shareholders.
At this rate, an investment in Unilever shares could distribute more than 10% per 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 cannot easily trade up or down from alternatives due to price, perceived quality, or any other reason. That means that profit growth is not guaranteed.
In the short term, the choice is between getting 10% from a small risk or 3.15% from potential growth. On that basis, sitting with cash for a year before buying stocks seems like a good idea.
The problem with this is that Unilever's share price has been showing positive momentum recently, as the new CEO transition process is underway. The stock is up 19% over the past 12 months.
If this continues, the stock could have a lower dividend yield next August — especially if interest rates continue to fall. So the opportunity to buy Unilever shares may not be there when it comes time to invest.
Money vs. stocks
I think a savings account with a 10% interest rate is a very attractive proposition. But I don't see it as an alternative to investing in stocks. Like most investors, I have money set aside for emergencies. And the chance to earn 10% on a portion of this is very welcome.
When it comes to income, I look for opportunities that have a good chance of paying off over time. This is why I will still buy dividend stocks even with low yields.
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