£20k in savings? Here’s how an investor can turn that into an income of £5k a year

One common way to get income is to buy blue-chip stocks and get dividends, by owning them. Over time, that can build up to a large amount of money coming in the door without having to work for it.

If an investor has £20k to spare, here’s how they can target £5k in annual income from dividends.

Doing math on dividend yield

£5k a year from £20k equates to a 25% annual return. No FTSE 100 share offers anything like that – and even if one does, I would be very careful as such a high yield would be an indication that the City does not expect the shares to last long. After all, no profit is guaranteed.

This is where consolidation can help an investor. That means reinvesting profits.

Imagine, that an investor has accumulated £20k at an average annual rate of 8%. After 15 years, the portfolio will have more three times in number. It would be large enough that, at an 8% yield, it would generate over £5k of income each year.

Finding stocks to buy

While 8% is higher than the FTSE 100 average yield (more than double, in fact), I think there are other blue-chip equity investors to consider when putting together an income portfolio that provides nearly that yield.

Case in point: Legal & General (LSE: LGEN). Known for its well-known multi-colored umbrella symbol, the financial services company benefits from broad brand awareness, a large customer base and a proven business model.

I think the retirement financial services business is a promising business to be in as it involves huge sums of money and seems to be going forever.

The company aims to increase its profit every year. The stock is already yielding 9.3%, so that would be good news from an income perspective.

As I mentioned above, high yields can raise risk – and 9.3% is among the top FTSE 100 yields. Another risk I see is that a financial crisis could force a company to focus on meeting its cash needs just as prices fall and customers withdraw funds. Last time, in 2008, we saw a budget cut.

It is now far beyond what it was before that episode though. As a long-term investor, I am always excited about the income prospects offered by Legal & General shares and consider them worthy of consideration.

Getting started

Before buying any stocks, an investor needs a practical way to do so. It therefore makes sense to look at the various options for a trading account or a Stocks and Shares ISA. Each investor has his own set of circumstances and goals.

One thing I look for in such a situation is money and costs. I don’t want to earn income on the other hand only to eat it up by paying high expenses!