Having cash in the bank for a rainy day is really important. However, excess money beyond emergency expenses could be wasted just sitting there. Rather, I’d want to try and put that spare cash to work to generate passive income. So assuming that I have £11k in the bank that’s surplus to requirements right now, here’s how (and where) I’d invest it.
How I’d go about it
Naturally, I’d be able to generate some risk-free income from having the money in my bank. Yet given the base rate is 5%, it’s unlikely I’ll be able to get more than 4% from my banking provider. Therefore, I want to target stocks with a dividend yield above 4%. Below this it doesn’t really make sense to invest in the market for income.
After applying a filter for yields in excess of 4%, I then want to select a dozen ideas and diversify them. This means that my selection needs to include shares from varying sectors, countries and of different market cap size.
Once I have this balanced mix of stocks, I can start to put my money to work. I’m not going to invest all my cash in one go. As the past few weeks have shown, a market correction can happen out of the blue, providing me with an opportunity to snap up my favourite shares at a cheaper price. So staggering my purchases over the course of several months makes sense.
An idea for consideration
One example of a stock I like at the moment is IG Group (LSE:IGG). The investment and trading platform provider has been performing really well over the past year. The stock is up 32% over this period, with a dividend yield of 5.04%.
It’s in a real sweet spot of still being a growth stock, but at the same time being large enough to justify paying out income to shareholders. The dividend per share has increased for the past four years, as the firm becomes larger and more profitable. Competition in the retail investing space has increased, so although it’s increasing market share, it can’t be taken for granted going forward.
It’s true that the latest annual results were a little disappointing with total revenue down 3% to £987.3m. The lack of volatility in the markets was partly to blame. Yet given the rollercoaster of market movements over the past month, I expect activity to have bounced back. Further, with the US election on the horizon, along with potential interest rate cuts from the US Federal Reserve, I think the run to the end of the year could be choppy too, which would be good for IG.
When I get some free cash, it’s an idea that I’d like to add to my existing portfolio.
How it all adds up
I believe I could build a portfolio of a dozen stocks with an average yield of 5.5%, including stocks like IG Group. If I made use of the full £11k, this could pay me £605 in the following year.
Instead of including any new money, I’d reinvest the £605 in the same portfolio. For the next decade, I’d do the same with any dividends I receive. Although I can’t perfectly model this, I can forecast approximately what this would grow to. From my calculations, after a decade my pot could be worth just over £19,000. This means in the following year, I could expect to make £1,047 in income.
