It may seem enticing to leave cash sitting in the bank right now. After all, there are some pretty attractive interest rates on savings accounts at the moment. But as rates are cut, the interest on offer will fall. That’s why I’d invest in the stock market and make some passive income.
Making extra cash on the side of my full-time job’s the dream. And through buying dividend shares, it’s achievable with very little effort.
The average FTSE 100 dividend yield‘s 3.6%. However, I like to target stocks with a yield of 5% or higher. That way, over time, they can pay me a juicier second income.
If I had £20,000 sitting idle, here’s what I’d do today.
Step 1
I’d kick things off by opening a Stocks and Shares ISA. It took me until a few years into my investment journey to realise just how powerful an investment tool these are.
Every year, each UK investor’s given £20,000 as an allowance to invest in their ISA. Any capital gains made or dividends received through an ISA aren’t taxed.
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.
Step 2
After that, I’d start researching the FTSE 100 for what sort of companies I want to own. Many businesses on the Footsie are household names. But even so, I’d make sure to do my homework.
I like to target companies with proven business models, large customer bases, and strong cash flows. The last one’s especially important when it comes to a firm paying a dividend.
With £20,000, I’d look to spread my cash between five to 10 stocks. I never want to be reliant on a single company or industry. That leaves me more prone to volatility. Diversification’s key to any successful portfolio.
One I like
A stock I like the look of at the moment is Phoenix Group Holdings (LSE: PHNX). The business specialises in the insurance industry and has over £280bn of assets under administration.
Today, it boasts a 10.1% payout. As the chart below highlights, its yield has been steadily rising over the last five years. Last year, it was upped by 3.6%. Moreover, its forward yield for 2025’s 10.3%.
Created with TradingView
What’s more, to go with its rising yield is a cheap valuation. As you can see below, the stock trades on a forward price-to-earnings ratio of 11.5. That’s below the FTSE 100 average.
Created with TradingView
The business also has a strong balance sheet. Its Solvency II capital ratio is 176%. As a stalwart in the insurance sector, it also has a large customer base.
One risk is that the insurance industry’s cyclical. Inflation and high interest rates have weighed down on the stock. But at its current price, I’m planning to take a closer look at Phoenix Group.
Passive income
Taking its 10.1% yield and applying it to my £20,000 would see me earn £2,020 a year in passive income. While that’s not bad, there are ways I could boost that.
For example, if I reinvested those dividends across a 30-year timeframe to benefit from dividend compounding, after year 30 I’d receive a second income of £39,109. That’s £3,259 a month. By then, I’ll hopefully be thinking about retirement. That income will go a long way in helping.
