How much do you need in an ISA to aim for a second income of £11,341?
With inflation still running ahead of target and the cost of living continuing to rise, earning a second income from doing very little remains an attractive prospect. Thatâs why lots of people buy dividend shares. And with a bit of thought and some careful research, I reckon itâs possible to earn a five-figure second income. Hereâs how.
One approach
Given the financial pressures Iâve just described, itâs unlikely that many people will have a large sum to invest, especially those in their twenties. However, by investing little and often, I think itâs possible to build up a decent nest egg that could produce a second income for later in life.
Letâs assume that itâs possible to find £100 a month. Based on this amount, the table below shows various combinations of timescales and rates of return to give an idea of how an ISA might grow.
| Period (years)/return | 5% | 6% | 7% | 8% |
|---|---|---|---|---|
| 15 | 26,590 | 28,830 | 31,286 | 33,977 |
| 20 | 40,745 | 45,564 | 51,040 | 57,266 |
| 25 | 58,812 | 67,958 | 78,746 | 91,483 |
| 30 | 81,869 | 97,925 | 117,606 | 141,761 |
To give some idea at to whatâs possible, the average annual return (with dividends reinvested) on the FTSE 100 from 2016 to 2025 was 7.9%. Over this period, the best year was 2025 (25.8%) and the worst was 2020 (-11.5%).
What’s next?
Now letâs see how much of a second income could be generated by taking the highest amount in the table (£141,761) and assuming itâs used to create a portfolio of dividend-paying shares.
| Yield | Annual second income (£) | Monthly equivalent (£) |
|---|---|---|
| 4% | 5,670 | 473 |
| 5% | 7,088 | 591 |
| 6% | 8,506 | 709 |
| 7% | 9,923 | 827 |
| 8% | 11,341 | 945 |
For context, the highest amount is just over £600 less than the State Pension for someone with a full record of contributions.
Laying the foundations for a second income
One share that I thinkâs worth considering as part of a diversified portfolio of dividend stocks is Persimmon (LSE:PSN). For 2025, I believe itâs going to pay 60p a share, although the consensus of analysts is 64p.
If Iâm right, the stockâs currently (6 February) yielding 4.2%. It wasnât that long ago â 2022, in fact â that its payout was 235p. At the time, the yield was close to double digits. But the pandemic played havoc with completions, margins, and earnings, with the dividend suffering as a result.
Even so, I think the groupâs directors deserve a pat on the back for getting the business through the pandemic relatively unscathed. The group doesnât have any debt on its balance sheet and it has lots of land on which to build. Its properties are also cheaper than its rivals.
And I think there are some early signs that the worst could be over for the housing market. But recoveries are rarely smooth so there are likely to be a few bumps along the way. However, interest rates are widely expected to fall further, making mortgages more affordable.
Structurally, there remains an under-supply of houses. The governmentâs also trying to remove certain planning restrictions that have historically been a barrier to housebuilding.
Persimmon and other housebuilders will benefit if confidence returns to the market. If it does, there will be plenty of scope for the group to increase its dividend further. Analysts are expecting a 2027 dividend of 72.46p, implying a forward yield of 5.1%. Of course, there can be no guarantees.
UK investors have a large number of dividend shares from which to choose. And I reckon those looking to establish a second income stream could consider Persimmon for their Stocks and Shares ISAs.
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James Beard has positions in Persimmon Plc. The Motley Fool UK has recommended Persimmon 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.
