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If I had £20,000 saved up, I wouldn't let it sit idle in the bank. Instead, I would invest it in the stock market and start earning a small income.
I like the idea of making extra money on the side without doing any work. And from buying stocks that reward investors with meaty dividend yields, I can do just that.
To target an income worth more than £19,000 a year, I would follow these steps.
First steps
First, I will open a Stocks and Shares ISA. It is one of the most efficient tax books available to retail investors. With an ISA, every UK investor is given an allowance of £20,000 a year. Zero tax is paid on capital gains made and dividends received.
Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
After opening my ISA, the next thing to do would be to find out what kind of stocks I want to own. In my opinion, blue-chip companies in FTSE 100 they are much better.
Not only are many sports index businesses bearing fruit but they are also proven business models with large customer bases and strong growth potential. I will also make sure to diversify my portfolio. I would never want to rely on just one company.
For example
One stock I like is IM&G (LSE: MNG). If I had the cash, I would buy a property manager today.
It has lost 7.5% of its value by 2024. But that means it now yields 9.5%. It went public in 2019. Since then, the company has increased its payout to shareholders every year.
Assignments are not guaranteed. Burberry Axing its shares recently was a stark reminder of this. However, management has stated its intention to continue with the approach of increasing shareholder awards every year.
IM&G operates in a large industry and within that has a strong market position. It has almost 5m customers. In addition, it manages the assets of more than 900 institutional clients.
That said, the industry is competitive. And more economic uncertainty will hurt business. For example, it can lead to clients withdrawing money.
But the balance of it brings me closer. Its shares trade at a forward price ratio of 8.8. That looks like a pretty good price on paper.
The power of time
I know the power of leaving my money in the stock market as long as possible. So, I will give myself an investment period of 25 years.
By taking the M&G yield and applying it to my total, I could earn £1,900 a year in passive income. That is nothing to scoff at. It would certainly come in handy. But there are ways I can improve that.
Otherwise, I will reinvest my profits. If I did that, after 25 years I would be earning £19,233 a year in passive income.
Furthermore, if I decided to invest an extra £300 a month, or £75 a week, in year 25 I could make a staggering £52,074 in income. That's around £4,340 a month.
That would have helped me a lot to lead a more comfortable life in my growing years.
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