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£5,000 in savings? My aim is £17,200 a year in passive income.

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I think it’s smart to stash some money away in a savings account for a rainy day. But leaving cash in the bank isn’t the most effective way to make it work harder and generate passive income.

High interest rates have seen banks offer attractive savings rates over the past few years. But if I want to start making some extra cash, I’ll do it by buying dividend shares.

I see it as one of the easiest and most effective ways to build wealth. With £5,000, here’s how I want to turn it into significantly more second income.

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Firstly, I would use an investment vehicle such as a stocks and shares ISA. Each year investors are given a limit of £20,000 to use. So, even after investing my £5,000, I will still have plenty left over to invest further. With a stocks and shares ISA, I pay no tax on the profits I make.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any tax advice.

Secondly, I will target stable businesses with yields above 6%. To do this, I will turn to FTSE 100 And FTSE 250. They are home to many household names in the UK that have proven and stable business models.

How will I get there?

To achieve your goals, it’s like a stock M&G (LSE: MNG) which I will target. Despite the rise in footsy, the investment manager has struggled this year. So far, its stock is down 10 percent.

But with its cheap share price comes a high yield. Currently, the stock boasts a 9.8% payout, the fourth highest in the index.

Of course, profits are never guaranteed. That said, M&G has a track record of growing its profits. It has increased its payout every year since it was listed in 2019. The objective of the management is to increase its profit every year going forward.

Furthermore, M&G is a stable business with a wide customer base. These are the types of companies I invest in. Last year, its adjusted operating profit rose 28% year-on-year to £797m.

The risk is that it experiences consumer withdrawals from funds in the coming months as economic uncertainty continues. We saw this happen last year.

But this is a stock that I think investors should consider today. Trading at 8.8 times forward earnings, its shares look cheap. This is cheaper than the Footsie average of 11. Interest rate cuts are expected later this year, which could also help stocks move forward.

Targeting passive income

With this in mind, I now need to convert my £5,000 lump sum into another recurring income. Taking M&G’s 9.8% yield and applying it to my money would give me £440 a year in passive income. I would like to make more.

To achieve this, I will reinvest my profits. This will allow me to take advantage of compounding, essentially meaning I will earn interest on my interest. Additionally, I will add a monthly contribution of £100. There are many benefits of investing on a regular basis.

After 25 years, compounded at 9.8%, my £5,000 will generate £17,200 a year in interest. This will set me up for a much more comfortable retirement.


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