If I had £20,000 saved, I wouldn’t let it sit idle in a bank. Instead, I’d invest it in the stock market and start earning juicy passive income.
I love the idea of making extra cash on the side without doing any work. And from buying shares that reward investors through having meaty dividend yields, I can do just that.
To target a passive income worth over £19,000 a year, I’d follow these steps.
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The initial steps
Firstly, I’d open a Stocks and Shares ISA. It’s one of the most effective tax wrappers available to retail investors. With an ISA, every UK investor is given a £20,000 a year allowance. Zero tax is paid on the capital gains made and dividends received.
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.
After opening my ISA, the next thing I’d do would be to figure out what sort of stocks I want to own. In my opinion, blue-chip companies on the FTSE 100 are the best.
Not only do many businesses on the index sport thumping yields but they’re also proven business models with large customer bases and strong growth potential. I’d also be sure to diversify my portfolio. I’d never want to be reliant on just one company.
An example
One stock I like is M&G (LSE: MNG). If I had the cash, I’d buy the asset manager today.
It has lost 7.5% of its value in 2024. But that means it now yields a whopping 9.5%. It went public in 2019. Since then, the company has increased its payout to shareholders every year.
Dividends are never guaranteed. Burberry axing its dividend recently was a stark reminder of this. However, management has stated its aim of continuing the trend of increasing shareholder rewards every year.
M&G operates in a massive industry and within that it has a strong market position. It has nearly 5m customers. Plus, it manages assets for over 900 institutional clients.
That said, the industry is competitive. And further economic uncertainty will hurt the business. For example, it could lead to clients pulling money from funds.
But its valuation draws me in. Its shares trade on a forward price-to-earnings ratio of 8.8. That looks like very good value on paper.
The power of time
I know the power of leaving my money in the stock market for as long as possible. So, I’d give myself a 25-year investing timeframe.
Taking M&G’s yield and applying it to my lump sum, I’d earn £1,900 a year in passive income. That’s nothing to scoff at. It would certainly come in handy. But there are ways I can boost that.
For one, I’d reinvest my dividends. If I did that, after 25 years I’d earn £19,233 a year in passive income.
What’s more, if I decided to invest an extra £300 a month, or £75 a week, by year 25 I’d make a staggering £52,074 in passive income. That’s around £4,340 a month.
That would go a considerably long way in allowing me to live a more comfortable life in my later years.
