£20K in savings? Here’s how I’d invest that and bag a second income worth £1.5k a month!

I’m regularly thinking about how I’m going to finance my retirement. I reckon it’s possible for me to build a second income stream to enjoy later in life.

Here’s how I could do that by investing in dividend-paying stocks.

My plan broken down in simple steps

Let’s say for the purposes of this article I have £20,000 in savings. I want to invest that, and another £250 per month, to maximise my money pot.

Firstly, I need an investment vehicle. I’m going to opt for a Stocks and Shares ISA. There’s a £20k annual allowance if I want to invest future lump sums, and I don’t have to pay tax on dividends received!

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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Next, I would like to have a diverse portfolio of stocks, approximately 5-10 should be enough. I’m looking for maximum returns from stocks that are ideally industry leaders, with a good track record, enticing rate of return, and future proof prospects of regular returns.

Doing some quick maths, investing my £20k initial lump sum, and £250 for 25 years, aiming for a 7% return, I’d be left with £317,026.

Next, I’m going to draw down 6% annually, which is £19,021. As a monthly additional income, that would equate to £1,585. That’s a tidy sum, in my eyes.

There are risks I must note. Firstly, dividends aren’t guaranteed, and they’re only ever paid at the discretion of the business. Next, I might not achieve a 7% yield, as stocks come with risks, so my pot of gold at the end of the 25-year rainbow might be less than expected.

Renewable energy pick

Real estate investment trust (REIT) Greencoat UK Wind (LSE: UKW) looks like a prime stock to help me achieve my aims.

The business invests in offshore and onshore wind farms, and sells the energy it generates to firms that supply power to peoples homes. As it is a real estate investment trust (REIT), it must return 90% of profits to shareholders, which is attractive for a dividend-seeker like me.

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.

A dividend yield of 7.5% fits perfectly into my plan of achieving the plan mentioned above. Furthermore, the business has a good track record of payouts over the past decade. However, I understand that past performance as it isn’t a guarantee of the future.

Moving on, renewable energy efforts are ramping up as the world looks to move away from traditional fossil fuels. This could offer the business excellent future prospects if it can grow, and capitalise on the rapidly evolving energy landscape.

Despite my bullishness, Greencoat shares do come with risks. The biggest one is the tight regulation around land that wind farms are built on. This complex regulation could hinder growth aspirations, which in turn could harm earnings and investor rewards.

Looking at a shorter-term risk, with interest rates high presently, borrowing to fund growth could be slower and costlier. REITs often borrow money to fund growth, so this is something I’ll keep an eye on.

Overall, I reckon Greencoat is a great stock to help me bag dividends, and maximise any potential additional income stream I’m looking to build.