Here’s how an investor could use their £20k ISA to target a second income of £1,200 in year one

A Stocks and Shares ISA is a brilliant way to build a second income stream, from a portfolio of dividend-paying FTSE 100 shares.

Investors may not need the income today, but it doesn’t matter. They can reinvest every shareholder payout back into the stock, to turbo-charge growth. Then draw it as passive income when they retire.

This year’s annual deadline it’s just a few days away, at midnight on 5 April. So investors who want to secure this year’s £20,000 allowance shouldn’t hang around.

Securing the ISA allowance

Investors shouldn’t panic if they aren’t sure which shares to buy though. They can park money in their Stocks and Shares ISA as cash. They’ll earn a spot of interest while making their picks.

They shouldn’t leave it there too long though, money works harder in equities than cash, albeit with more short-term volatility.

Spreading money across a range of dividend stocks reduces risk. Even strong companies can cut their payouts, so diversification helps keep passive income flowing.

To generate £1,200 income from £20k, the ISA would need an average 6% dividend yield. That’s achievable, by building a balanced portfolio around a dozen or so dividend stocks, which could include fund manager Schroders (LSE: SDR). This, coincidentally, yields exactly 6% a year.

Schroders’ a top income stock

Schroders actively manages global investment funds, yet in recent years is own share price hasn’t done particularly well.

It’s down 4% over 12 month,s but lately it’s sprung to life, jumping 15% in the last three months. Even after this rise, the Schroders share price looks decent value, with a price-to-earnings ratio of 13.5, slightly below the FTSE 100 average of around 15 times.

Dividend cover’s a bit thin, at 1.2 times earnings, but it’s expected to rise to 1.4 this year, suggesting greater sustainability. Meanwhile, operating margins are forecast to increase from 21.6% to 25.4%, a positive trend.

Don’t forget the dividends

Schroders does face challenges. The rise of passive index-tracking ETFs has made life harder for traditional fund managers. Volatile markets haven’t helped either.

Full-year results, published 6 March, showed profits falling 3% to £640.5m, amid higher costs and lower performance fees.

Assets under management rose 4% to £778.8bn though, and statutory pre-tax profits jumped 14% to £558m.

The board also outlined a three-year plan to attract new business and cut costs. It aims to save £150m annually, with £20m already delivered in Q1.

FTSE 100 income star

The 14 analysts covering Schroders produce a one-year price target of 407.4p, implying a 14% increase from today’s price. Throw in the 6% yield would deliver a 20% total return including dividends. Not bad though of course, nothing’s guaranteed.

Well I think Schroders is worth considering for more experienced investors, those less confident should maybe take a look at FTSE 100 income stocks like Aviva, Lloyds Banking Group, British American Tobacco and National Grid. They’ve done better lately.

While the market remains unpredictable, a diversified dividend-focused Stocks and Shares ISA may offer a realistic way to build a high-and-rising second income over time.

The post Here’s how an investor could use their £20k ISA to target a second income of £1,200 in year one appeared first on The Motley Fool UK.

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Harvey Jones has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., Lloyds Banking Group Plc, National Grid Plc, and Schroders 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.