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Having a lump sum of cash and not knowing how to invest it can be a problem. I think the best thing you can do is start generating passive income.
This way, it means I am putting my money to work. My plan is to invest in stocks that provide a substantial and stable return. Later, I can use these funds to improve my lifestyle or have a more comfortable retirement.
If I had £20,000 saved, this is what I would do today.
Maximizing my returns
£20,000 is a good sum of money. It is also the maximum annual contribution for a Stocks and Shares ISA. Every investor in the UK is entitled to this limit. If I decided to withdraw my money, I could do so tax-free.
In addition to my £20,000, I would also look to add monthly contributions. I see this as a smart way to maximize my potential earnings.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice.
How much could I earn?
So how much passive income could you generate? Let's assume an annual return of 8%. That's about the annual percentage that FTSE 100 has returned since its inception in 1984.
Of course, goals vary from person to person depending on a number of factors. One of the most important is the investment term.
My goal is 30 years, so let's use it. After that time, my initial £20,000 could be worth £218,714.
What's more, if I invested an extra £100 a month, my savings could be worth more than £367,750!
If I then retired at that point and applied the '4% reduction' rule, that would leave me with £14,710 in passive income a year.
What to aim for
But what actions would help me get there? Well, I would look to buy companies like Legal and general (LSE: LGEN).
Currently, its shares yield a healthy 8.1%. It's not the tallest in the Footsie, but it's certainly up there.
Dividends are never guaranteed. And high performance can sometimes be unsustainable. However, I am confident that the company will continue to deliver value to shareholders in the years to come.
It has demonstrated this with its latest cumulative dividend plan, which is on track to return up to almost £6bn to shareholders by the end of this year. More broadly, its dividend payout has grown 72% over the last decade.
Operate in a volatile industry. Given the macroeconomic pressures of recent years, the business has been affected. Its operating profit fell by £17m in the first half of 2023 compared to a year earlier. Its assets under management have also been affected in recent times.
But for a long-term purchase, I think Legal & General could be a winner. The iconic brand is a leader in the pensions industry, including the UK pension risk transfer market. This puts it in a good position to capitalize trends such as the aging of the UK population. It also looks cheap, trading at just 6.9 times earnings.
Diversification is imperative for a successful portfolio. Therefore, I would not invest all my money in one company. That said, Legal & General would be one of the stocks I would look for to help me achieve my goals.
