With interest rates high, I could leave my cash in the bank right now and earn a decent savings rate. However, that’s a short-term outlook. More rate cuts are expected this year and next. And when they are reduced, the interest on offer will follow suit.
That’s why I’d invest my cash in the stock market and start earning passive income.
Over the long run, this is a brilliant method to build wealth. It may feel like making extra cash on the side of a full-time job isn’t possible. But that’s far from the case. By buying shares with juicy dividend yields, it actually has the potential to be rather easy.
If I had £20,000 stashed away, here’s what I’d do.
A Stocks and Shares ISA
With my hard-earned cash, I want to maximise how much income I can make from it. That’s why I’d open a Stocks and Shares ISA. Every year, each investor in the UK has a £20,000 use-it-or-lose-it investment limit. Any capital gains made or dividend payments received through an ISA are tax-free.
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.
What stocks to buy
So I’ve opened my ISA and I have my cash ready to invest. But what sort of stocks should I buy?
For me, I like to keep it simple. I largely target FTSE 100 companies. Most businesses on the index are household names. They operate in massive industries with large customer bases. And, most importantly, they’ve stable cash flows. That’s super important when it comes to rewarding shareholders with a dividend.
One I really like the look of at the moment is Phoenix Group Holdings (LSE: PHNX). The company operates in the insurance industry. It’s a large player in the space with around £300bn of assets under administration.
The stock boasts a whopping 9.6% yield. That blows the FTSE 100 average of 3.6% out of the water. Of course, dividends are never guaranteed. However, I like Phoenix Group’s progressive dividend policy. In the last five years, its payout’s been climbing. Back then, it stood at 46.8p per share. Today, it’s 52.7p, or 12.5% higher.
There are a few risks with it though. For one, the insurance industry’s highly cyclical. Racing inflation and high interest rates have seen its share price suffer over the past couple of years. That’s still a threat. A delay in future cuts could cause the stock to be pulled back. Furthermore, the insurance industry’s very competitive.
But trading on a price-to-earnings ratio of 10.3, below the FTSE 100 average of 11, I think that looks like good value for a company of Phoenix Group’s quality.
Talking money
Taking Phoenix Group’s 9.6% yield and applying it to my £20,000 ought to see me earn £1,920 a year in passive income. That would come in handy. But with the aim of funding my retirement, I’m vying for more.
That’s why I’d reinvest my dividends along the way to benefit from dividend ‘compounding’. By doing that, after 30 years, I’d earn £32,119 in interest. What’s more, my nest egg would have grown from £20,000 to over £352,226.
That sort of money would go a long way in ensuring I lived a more comfortable lifestyle further down the line.
