How much do you need in an ISA to target a £30,000 second income?

More and more, the prospects of a comfortable retirement hinge on building up an independent second income.

What might it take to earn £30,000 per year? It depends on aiming for a realistic annual return — and the sum we then need to accumulate.

Is 7% per year achievable, say from UK dividend shares in a Stocks and Shares ISA? I think so. Let me explain why.

A great track record

Over the past 10 years, Stock and Shares ISAs have averaged a return of 9.6% per year. That doesn’t mean the next decade will be the same. But if we look back 20 years, the FTSE 100 has returned an average of 6.9% per year.

The further back we look, the more we see profits from UK public companies beating other forms of investment.

Do I believe the UK stock market will continue in the winning ways we’ve seen for well over a century now? Let’s put it this way… if working companies can’t continue to generate new wealth, I don’t know where else it’s going to come from.

UK tops for dividends

The UK stock market is brilliant for dividends. In the US, investors might have their sights firmly fixed on stock price growth. But over there, 2% or 3% is considered a good dividend yield.

In the UK, the FTSE 100 tends to average between 3% and 4%. And the top payers in the index can often offer two or three times that. Right now, I count eight stocks with forecast dividends over 6%.

Dividends aren’t guaranteed. But these two facts — the UK’s dividend tradition coupled with a great track record — convince me 7% per year can be achievable.

Nearly half a million!

Put 7% returns together with that £30,000 annual income goal — and we’d need close to £430,000. That’s more than 20 years’ maximum ISA allowance.

But that ignores the effects of compounding. If we can hit 7% per year and reinvest dividends in more shares, it could take less than 14 years.

The amount of the allowance we can use depends on each individual. But by taking a long-term approach, and investing as much as we can every month, these ambitions really can be within reach.

A fat 9% yield

I’m thinking of adding Legal & General (LSE: LGEN) to my ISA holdings, for its forecast 9% dividend yield.

Aside from the yield, I’ve always liked insurance companies for their long-term cash generation potential. Income can be variable though, so there’s probably more risk of dividend ups and downs with a stock like this. And the sector is at risk from economic turmoil perhaps more than most. That’s why I say diversification plus a long-term horizon is a must.

The shares can be a bit volatile too. The Legal & General share price is up 23% over the past five years — but that’s all due to a spike in late 2020. Since then it’s been largely sideways.

Still, if all I want is my dividend cash and I have no plans to sell the shares, the price shouldn’t matter. Well, I say that… but future falls would mean I could buy even more with my reinvested dividend cash!

The post How much do you need in an ISA to target a £30,000 second income? appeared first on The Motley Fool UK.

More reading

• Legal & General shares yield a bumper 9.1% – but is its dividend safe?
• With its 9% yield and trading 54% below fair value, is it time I buy more of this FTSE 100 passive income gem?
• How much do you need in an ISA to target £587 of extra income each week?
• 9% dividend yield! But this ‘Big Short’ investor is steering clear of Legal & General shares
• 10 reasons why the FTSE 100 could hit 10,000 by Christmas!

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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