£20,000 in the bank? That would translate into an annual income of £39,109

It may seem tempting to leave cash sitting in the bank right now. After all, there are attractive interest rates on savings accounts right now. But as rates are reduced, the interest rate offered will decrease. That's why I invested in the stock market and made passive income.

Making extra money on the side of my full time job is a dream come true. And by buying dividend stocks, it can be accomplished with very little effort.

Average FTSE 100 paid a dividend of 3.6 %. However, I like to target stocks with a yield of 5% or more. That way, in the long run, they can pay me a nice second salary.

If I had £20,000 sitting around doing nothing, this is what I would do today.

Step 1

I'll start things off by opening a Stocks and Shares ISA. It took me until a few years into my investing journey to realize how powerful an investment tool it is.

Every year, each UK investor is given a £20,000 allowance to invest in their ISA. Any capital gains made or dividends received through an ISA are tax-free.

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.

Step 2

After that, I would start researching the FTSE 100 what kind of companies I want to own. Many businesses in Footsie are household names. But still, I made sure to do my homework.

I like to target companies with proven business models, large customer bases, and strong cash flow. The latter is especially important when it comes to a company that pays a dividend.

For £20,000, I would look to spread my money between five to 10 stocks. I never want to rely on one company or industry. That leaves me prone to change. Diversification is the key to any successful portfolio.

One of my favorites

A stock that I like to look at right now Phoenix Group Holdings share price (LSE: PHNX). The business specializes in the insurance industry and has over £280bn of assets under management.

Today, it has a payout of 10.1%. As the chart below highlights, its yield has been rising steadily over the past five years. Last year, it increased by 3.6%. In addition, its forward yield to 2025 is 10.3%.

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In addition, going with its growing yield is a cheap valuation. As you can see below, the stock is trading at a forward earnings ratio of 11.5. That is below the FTSE 100 average.

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The business also has a strong balance sheet. Its Solvency II capital ratio is 176%. As a major in the insurance sector, it also has a large customer base.

Another risk is that the insurance industry is cyclical. Inflation and high interest rates have weighed on stocks. But at its current price, I plan to take a closer look at Phoenix Group.

Net income

Taking its 10.1% yield and applying it to my £20,000 would see me earning £2,020 a year in income. While that's not bad, there are ways I could improve that.

For example, if I reinvest those dividends over a 30-year period to benefit from compounding, after the 30th year I will have a secondary income of £39,109. That's £3,259 a month. By then, I hope to be thinking about retirement. That income will go a long way in helping.