Stock market

£11,000 in savings? This could be a second income of £19,821 a year.

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Over the past few years, I’ve built a line to start generating a second income. And I’m not alone.

Investors have become more conscious about putting their money to work. After all, who can blame them when we have weathered the storm of inflation?

With an eye on my retirement, I can deposit my cash in the bank and take advantage of the attractive savings rates on offer. But to put myself in the best position to build wealth in the long run, I’m taking a different approach.

Instead, I’m buying stocks with huge dividend yields. gave FTSE 100 The average is 3.6%. I want to target stocks with yields of 5%, or more.

The average saved in the UK is £11,000, so let’s use that as a baseline. Here’s how it can become a second income of around £20,000 a year.

what to buy

Before I get into the numbers, I want to give an example of what kind of income stock I think might be a great buy today. One is my own. British American Tobacco (LSE: BATS). The stock has a yield of 9.6%. That’s above the 5% benchmark I look for.

Profits are never guaranteed. So during events like pandemics when profits are squeezed, businesses can sometimes cut their payouts. But this was not the case with British American Tobacco. It has paid dividends for over two decades. It’s a glowing record that fills me with hope that the business will continue to serve its shareholders.

I also like British American Tobacco shares because they are undervalued. Their price-to-earnings (P/E) ratio is 6.5. Their forward P/E is 7.1. Both of these are well below the footy average of 11. As such, I think its share price has plenty of room to grow.

The risk of investing in a business is that it operates in an industry that is coming under increased scrutiny. More laws are being introduced to regulate the tobacco industry.

But with its sweet yield and affordable price, I love the look of the stock.

How much could I make?

So how can my £11,000 turn into significantly more other income for retirement? If I invested in British American Tobacco today with its 9.6% yield, I would earn £1,056 a year in passive income. While I can use it to put toward things like bills or vacations, my goals are to earn more.

This is where compounding steps in. By reinvesting the dividend payments I receive, I am essentially earning interest on my interest. This is a method that many investors use to maximize returns.

If I do this with British American Tobacco, after 20 years I will earn £6,790 a year or £566 a month. Getting closer to where I want to be. But if along the way I can afford to invest £200 a month more, then by year 20, I’ll be earning £19,821 a year, or £1,652 a month.

Of course, it depends on the yield that remains the same, it may rise or fall during that time. I am also assuming that its share price is not going up.

However, it does prove that targeting high-yielding stocks and being patient can be the best way to build wealth and security for later in life.

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