How much do you need in an ISA to target a £2,000 monthly second income?
Building a second income is a dream for many investors, and a Stocks and Shares ISA is an effective way of doing it. But what sort of pot might be needed to deliver £2,000 a month without running it down too fast?
ISAs donât give upfront tax relief like pensions, yet they offer something just as valuable. All the passive income from dividends and capital gains from rising share prices are sheltered from HMRC, and withdrawals are free of income tax. So how big does the portfolio need to be to earn that £2k monthly income?
A £2,000 monthly target adds up to £24,000 a year. Using the so-called 4% rule, which theoretically allows investors to make withdrawals without eating into their capital, that requires an ISA worth around £600,000. Thatâs a big figure, but time and reinvested income can do a lot of the heavy lifting.
Compound growth and dividends
Imagine regular investing of around £500 a month into a diversified ISA achieving a long-term average return of 7% a year. After three decades, that could grow to just over £600,000, tax free. Steady habits can turn modest monthly sums into something meaningful.
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.
Rather than hugging the index, I prefer to hold a basket of 15 to 20 shares from the FTSE 100 and FTSE 250, mixing dependable dividend payers with a bit of growth. It might contain companies like HSBC Holdings (LSE: HSBA), a bank that has rewarded patient shareholders handsomely.
The HSBC share price has flown lately. It’s up 58% over the last year and 230% over five. Investors have got dividend income on top, although thanks to the high-flying shares the trailing dividend yield has slipped to just under 4%.
HSBC shares have soared
HSBCâs dividend record has been a little bumpy. It paid a total dividend of 51 US cents a share in 2015, but by 2020 that had declined to just 15 cents. To be fair, the pandemic didn’t help. Since then, itâs been catching up fast, including a bumper 90% rise in 2023 to 61 cents. In 2024, the board hiked payouts another 8.2% to 66 cents.
It’s also offered generous share buybacks, although these are currently paused for about nine months while HSBC completes the purchase of a minority stake in Hang Seng Bank. After such a strong run, HSBC is more expensive than it was, the price-to-earnings ratio now just over 14.
The bank has global reach, earning half of its revenues outside the UK, primarily in Hong Kong, China, and Southeast Asia. China is a huge opportunity but there are risks. Its economy is slowing, and population ageing. Political strains between Beijing and the West could put HSBC in an awkward spot. Falling interest rates may also squeeze profit margins.
After such a strong run, HSBC shares are likely to cool. Even so, long-term investors might consider buying HSBC today, or waiting patiently for a dip. Alternatively, they can find plenty of stocks on the FTSE 100 with higher yields, and they’re often cheaper too. That could speed efforts to hit that £2,000 monthly second income goal. No time to lose.
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HSBC Holdings is an advertising partner of Motley Fool Money. Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. 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.
