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.
This post was originally published on Motley Fool
