With attractive interest rates on savings accounts available right now, I might be tempted to leave my cash in the bank. After all, it’s pretty much risk-free. However, I think it’s a short-term solution. That’s why I’d invest my money in the stock market instead and start earning passive income.
It’s the dream for many to make extra cash on the side of their full-time jobs without much additional effort. While it may seem too good to be true, it’s more than doable.
I plan to do it by snapping up shares that boast meaty dividend yields. The FTSE 100 average is 3.6%. I like to target stocks that have a payout of 5% or higher.
Let’s say I had £11,000 tucked away in my savings. That’s the average amount in the UK. Instead of leaving it sitting there, here’s what I’d do today.
Maximising my returns
I’d get the ball rolling by opening a Stocks and Shares ISA. Every year, each investor in the UK has a £20,000 limit to invest in their ISA.
Any capital gains made or dividend payments received through an ISA are tax-free. That means I can maximise the total amount of money I can make instead of having to pay HMRC. In the first few years of investing, this may seem insignificant. But over the long run, it certainly adds up.
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A stock I’m keen on
I’d then need to decide where I wanted to invest my money. I think the best place to look is the FTSE 100. It’s home to blue-chip businesses with stable business models.
One Footsie share I’ve had on my watchlist for a while is M&G (LSE: MNG). It hasn’t been the best year for the investment manager. Its share price is down 6.7% year to date. That said, it has posted a decent performance over the last 12 months, rising 5.4%.
Its weak performance this year does come with one advantage: it means a higher yield. M&G’s payout currently stands at a whopping 9.5%.
Dividends are never guaranteed. However, since listing in 2019, the business has increased its dividend every year. It has laid out its aim to keep this up moving forward.
There are some risks with M&G. Economic uncertainty is the main threat. High interest rates can impact investor confidence, as we’ve seen over the last few years. This can lead to customers pulling money out of funds. While rate cuts have started in the UK, a delay in future cuts would spell trouble for the firm.
But I like M&G for its large customer base. What’s more, its shares look like good value. They trade on 8.5 times forward earnings.
Making money
Taking its 9.5% yield and applying it to my £11,000 would see me generate £1,045 a year in passive income. That would come in handy for paying my bills or going towards a holiday. However, ideally I want to make more.
That’s where ‘dividend compounding‘ comes in. By reinvesting the dividend payments I received over 30 years, I could enhance my returns.
It’s not guaranteed as I mentioned, but by year 30, I could earn £16,978 in interest. That’s £1,400+ monthly. What’s more, my nest egg would have grown from £11,000 to £188,043.
This post was originally published on Motley Fool
