Stock market

£20K in savings? Here’s how I’ll invest it and earn a second income of £1.5k a month!

I am regularly thinking about how I will finance my retirement. I understand that it is possible for me to create a second stream of income to enjoy later in life.

How can I do this by investing in dividend paying stocks?

My plan was broken down into simple steps.

Let’s say I have £20,000 in savings for the purposes of this article. I want to invest this, and £250 per month, to maximize my money pot.

First, I need an investment vehicle. I’m going to choose the Stocks and Shares ISA. There is a £20k annual allowance if I want to invest future lump sums, and I don’t have to pay tax on the profits I receive!

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 is it intended to be, any form of tax advice. Readers are responsible for doing their own due diligence and seeking professional advice before making any investment decisions.

Next, I would like to have a diversified portfolio of stocks, around 5-10 should be enough. I look for maximum returns from stocks that are ideally industry leaders, with good track records, attractive rates of return, and future proof prospects of regular returns.

Doing some quick maths, taking my initial lump sum of £20k, and investing £250 over 25 years, targeting a return of 7%, I would be left with £317,026.

Next, I’m going to put down 6% a year, which is £19,021. As additional monthly income, that would equate to £1,585. That’s a tidy sum in my eyes.

There are risks I should note. First, profits are not guaranteed, and they are paid only at the discretion of the business. Next, I might not get the 7% yield, because stocks come with risks, so my pot of gold at the end of the 25-year rainbow might be less than expected.

Choosing renewable energy

Real Estate Investment Trust (REIT) Greencoat UK Wind (LSE: UKW) looks like an important stock to help me achieve my goals.

The business invests in offshore and onshore wind farms, and sells the energy it produces to firms that provide electricity to people’s homes. Because it’s a real estate investment trust (REIT), it must return 90% of profits to shareholders, which is attractive to a dividend seeker like me.

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 is it intended to be, any form of tax advice.

A dividend yield of 7.5% fits perfectly into the acquisition plan I described above. Additionally, the business has a good track record of payouts over the past decade. However, I consider this past performance as no guarantee of the future.

Going forward, renewable energy efforts are accelerating as the world looks to move away from traditional fossil fuels. This can offer the business great future prospects if it can grow, and take advantage of the rapidly evolving energy landscape.

Despite my bullishness, greencoat shares come with risks. The biggest is strict regulation around the land on which wind farms are built. This complex regulation can stifle growth aspirations, which in turn can hurt earnings and investor rewards.

Given the short-term risk, with interest rates currently high, borrowing to grow the fund can be slow and expensive. REITs often borrow money to fund growth, so that’s something I’ll keep an eye on.

Overall, I think Greencoat is a great stock to help me get a dividend, and to maximize any potential additional income streams I want to build.


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