£20,000 in savings? Here’s how I’d aim to turn that into a £27,384 yearly passive income

This Fool wouldn’t leave his cash sitting idle. Instead, he’d put it to work in the stock market and start making passive income today.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I could leave my savings in the bank right now and pick up a pretty attractive interest rate. However, as rates are cut, the interest on offer will begin to fall. That’s why I’d invest my hard-earned cash in the stock market and start generating passive income.

It may seem like making extra cash on the side of my full-time job’s too good to be true. But in fact, by buying shares with chunky dividend yields, it has the potential to be rather easy.

If I had £20,000 sitting stagnant, here’s what I’d do today.

Opening an ISA

The first thing would be to open a Stocks and Shares ISA. Every year, each UK investor has a £20,000 use-it-or-lose-it investment limit.

Any capital gains made or dividends received through an ISA aren’t taxed. While that may not seem significant at first, over the course of decades, it can make a massive difference.

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.

Doing my homework

I’d then consider what sort of companies I want to buy. For me, I like to stick to the FTSE 100. Many businesses on the index are household names with stable business models. That often means they’ve strong cash flows, which is important when it comes to paying a dividend.

One to consider

A stock I’m keeping a close eye on at the moment is Phoenix Group Holdings (LSE: PHNX). The business is a Footsie stalwart that operates in the insurance industry. It has nearly £300bn of assets under administration.

What’s more, it has a whopping 9.2% yield. That’s been steadily rising over the last five years. During that time, its dividend payment has climbed 12.5% from 46.8p per share to 52.7p today. That includes a 3.6% rise last year.

To go with that, the stock looks like good value for money. It currently trades on a price-to-earnings ratio of 10.8. That’s below the FTSE 100 average, which is around 11.

I do see risks. The insurance industry’s cyclical. Inflation and high interest rates have seen the stock struggle in the last couple of years. If inflation jumps or there’s a delay in future interest rate cuts, that could harm its share price. On top of that, its industry is also highly competitive.

But Phoenix Group has a strong balance sheet to weather any potential storm. Its Solvency II capital ratio is 176%. I also like it for its strong brand presence and large customer base.

Making passive income

Taking its 9.2% yield and applying it to my £20,000 ought to see me generate £1,840 a year in passive income. That’s not bad. However, I’m aiming for more.

There are a few ways I could achieve that. For example, if I reinvested those dividends across 30 years to benefit from dividend compounding, after year 30 I’d earn £27,384 in interest. My nest egg would have grown from £20,000 to £312,688.

With the aim of investing now for a more comfortable retirement, it’s safe to say that sort of passive income would go a long way in helping.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how to invest £180 per week in an ISA to target a £9,343 second income

By investing less than a couple of hundred pounds each week into an ISA, this writer thinks he could build…

Read more »

Investing Articles

Here’s how I’d invest £200 per month to target a passive income of over £7,100!

Christopher Ruane walks through the mechanics of putting a couple of hundred pounds each month into shares to earn passive…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

£9,000 in an ISA? Here’s how I’d aim to turn it into a £10,207 annual second income

Our writer highlights a high-quality ETF that he thinks could help lay a solid foundation for a sizeable future second…

Read more »

Buffett at the BRK AGM
Investing Articles

With a spare £30 a week, I’d use the Warren Buffett approach to building serious passive income!

By learning some lessons from billionaire investor Warren Buffett, this writer aims to build passive income streams using modest regular…

Read more »

Investing Articles

If I’d invested £10k in the FTSE 100 25 years ago, here’s what I’d have today

Has the FTSE 100 been a winner over the last 25 years? Muhammad Cheema takes a look at this and…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

I’d aim for a million buying just 9 or 10 shares

Our writer explains why he believes careful selection of not that many quality blue-chip shares could help him aim for…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Investing Articles

£7,000 in savings? Here’s how I’d aim for almost £2,000 a month in passive income

With only a few thousand in savings and £100 to invest a month, our writer considers a strategy to aim…

Read more »

Investing Articles

4 great purebred UK shares that don’t rely on the US economy

UK stocks or American shares? Despite fantastic performance from US markets in recent years, the answer may not be as…

Read more »