£20,000 stashed away? Here’s how I’d use it to target a £2,766-a-month passive income

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I’ll admit my method when it comes to generating passive income isn’t the most glamorous. I don’t own a massive property portfolio. I also don’t have a side hustle focusing on a cutting edge industry such as the artificial intelligence (AI) sector.

Instead, I invest my money in the stock market and buy FTSE 100 companies with meaty dividend yields that can pay me a handsome second income.

Let’s say I had £20,000 in savings. Here’s how I’d go about targeting an income of over £2,700 a month.

The method

I’d get the ball rolling by opening a Stocks and Shares ISA account. It’s a great way for investors to boost their returns. That’s because the ISA acts as a tax wrapper. Any capital gains I made or dividend payments I received wouldn’t be taxed.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

I’d then target five to 10 companies in the Footsie offering above average (3.6%) yields. I could lump all my money into one company, but that’s not sustainable. Instead, I like to target a variety of companies with proven business models and large customer bases.

One share I like

An example of the above is asset manager M&G (LSE: MNG). It’s a stock I like and if I had the cash today I’d buy some shares.

There are a few reasons why. The asset management industry’s massive, and M&G has a large presence in the sector with millions of customers across numerous markets.

What’s more, its dividend yield is 9.6%. Since going public in 2019, its payout has increased every year. Management has said it aims to try and continue this trend.

There are risks. A weak economy is one. Its assets under management could take a hit should investors decide to pull their money from funds. That’s especially a threat during a cost-of-living crisis.

But M&G shares look dirt cheap trading on nine times forward earnings. As far as Footsie shares go, I think it’s a stock that investors should consider taking a closer look at.

The target

So how could my £20,000 in savings turn into a healthy stream of passive income? Well, applying M&G’s 9.6% yield, I’d earn £1,920 a year on my £20,000.

Don’t get me wrong, that would most certainly come in handy. But with the aim of funding my retirement with the income I make, I plan to generate more than that.

That’s why I’d reinvest my dividends along the way to benefit from compounding. This essentially means I’d earn interest on my interest.

By doing so, after 30 years, I’d make £32,119 a year in passive income. That works out to £2,766 a month. That’s more like it. With an income like that, I could live a much more lavish lifestyle after giving up work.

It must be noted that a near-10% return a year isn’t guaranteed. The market’s volatile. And while I’m optimistic we could see M&G’s payout keep rising, there’s the potential that it falls.

However, what this proves is that playing the long game pays off. I’m biding my time in the market as I continue to take steps closer to my financial goals. And as part of a diversified portfolio, it’s stocks like M&G I’d look to help get me there.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.