How much does someone need in an ISA to target a £30k second income each year?

Owning an ISA stuffed with high-quality dividend is one way to try and build a second income.

It can be a lucrative approach for someone who is willing to put in enough money and take a long-term approach.

Doing the maths

As an example, let’s work backwards from an annual second income target of £30,000.

Dividends are never guaranteed (that is why smart investors spread their risks by diversifying their portfolio). But at a simple level, annual income is a function of how much is invested and the dividend yield.

The yield is the annual dividend income expressed as a percentage of what the shares originally cost, which can be different to their current price.

So, for example, £300,000 invested at a 10% yield would generate an annual second income of £30,000. If the yield was 5%, the target would require a £600,000 portfolio.

That 5% is above the current FTSE 100 yield. I think it is realistic, though, in the current market to target a higher yield, of 7%. This is while sticking to blue-chip companies with proven business models.

Taking the long-term approach

Doing that, the annual second income target of £30,000 would require an investment of close to £429,000.

The good news is that investment can be built up over time. For example, say the investor opens a Stocks and Shares ISA today and invests £20,000 each year into it, compounding its value at 7% annually.

After 14 years, the portfolio should be worth more than £429,000. If it yields 7% at that size, it would then generate over £30,000 each year as a second income.

Being realistic – and taking action

So, although the second income requires a wait, I think 14 years is a reasonable time frame for such a goal.

After all, this is not some get-rich-quick scheme, but a serious effort to build an extra income stream through investing in carefully chosen quality companies.

I mentioned above that I see a 7% yield as realistic in today’s market.

One share I think investors eyeing a long-term second income ought to consider is FTSE 100 asset manager M&G (LSE: MNG).

It currently yields 7.9%. It also aims to grow its dividend per share annually and has done so over the past few years. Though, as I mentioned above, dividends are never guaranteed to last at any company.

I like M&G in part because the asset management industry is huge and long-term demand is resilient. With its strong brand and long experience, the company looks well-placed to capitalise on that over the long run. That helps explain why it has over 5m customers.

M&G has struggled in recent years to get clients to put more money in than they take out of its products. I see that as an ongoing risk to profitability.

In the first half, though, the company saw a net inflow of £2.1bn to business areas that are still open to investment. I see that as encouraging progress on this front.

The post How much does someone need in an ISA to target a £30k second income each year? appeared first on The Motley Fool UK.

More reading

• 2 high-yield FTSE 100 dividend shares to consider
• Here’s a 5-stock portfolio to consider to aim for £1k a month in passive income
• 3 UK shares going ex-dividend this week
• With a spare £280, here’s how someone could start buying shares this September
• Why I’m not buying this high-yielding FTSE 100 stock — yet

C Ruane 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.

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