Sitting on a lump sum of cash and not knowing how to invest it can be an issue. I reckon the best thing to do is start generating passive income.
This way, it means I’m putting my money to work. My plan is to invest in stocks that provide a substantial and stable yield. Further down the line, I can use these funds to enhance my lifestyle or have a more comfortable retirement.
If I had £20,000 in savings, here’s what I’d do today.
Maximising my returns
£20,000 is a healthy sum of money. It’s also the maximum annual contribution for a Stocks and Shares ISA. Every investor in the UK is entitled to this limit. If I decided I wanted to pull my money, I’d be able to do so tax-free.
On top of my £20,000, I’d also look to add monthly contributions. I see this as a smart way to maximise my potential earnings.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
How much could I make?
So, how much passive income could I make? Let’s assume a yearly return of 8%. That’s around the annual percentage the FTSE 100 has returned since its inception in 1984.
Of course, goals vary from person to person depending on a number of factors. One of the most important is investment timeframe.
My target is 30 years, so let’s use that. After that time, my initial £20,000 could be worth £218,714.
What’s more, if I were to invest an additional £100 a month, my nest egg could be worth over £367,750!
If I then retired at that point and applied the ‘4% drawdown’ rule, that would leave me with £14,710 in passive income a year.
What to target
But what stocks would help me get there? Well, I’d look to buy companies like Legal & General (LSE: LGEN).
Currently, its shares yield a healthy 8.1%. That’s not the highest on the Footsie, but it’s certainly up there.
Dividends are never guaranteed. And a high yield can sometimes be unsustainable. However, I’m confident the business will continue returning value to shareholders in the years to come.
It has shown this with its latest cumulative dividend plan, which is on track to return up to nearly £6bn to shareholders by the end of this year. More widely, its dividend payment has grown 72% in the last decade.
It operates in a volatile industry. Given the macroeconomic pressures of the last few years, the business has suffered. Its operating profit fell by £17m in the first half of 2023 compared to the year prior. Its assets under management have also taken a hit in recent times.
But for a long-term buy, I think Legal & General could be a winner. The iconic brand is a leader in the pensions industry, including the UK Pension Risk Transfer Market. This puts it in good stead to capitalise on trends such as the UK’s ageing population. It also looks cheap, trading on just 6.9 times earnings.
Diversification is imperative for a successful portfolio. So, I wouldn’t invest all my money into a single company. That said, Legal & General would be one of the shares I’d look to help me achieve my goals.
