How big does an ISA need to be to target a £1,000 monthly second income?

Using an ISA to earn a second income is a fantastic way to get more money in the bank tax-free. And with the London Stock Exchange filled with so many dividend stocks, investors are spoilt for choice when it comes to picking passive income investments.

But as everyone knows, it takes money to make money. So how big does an ISA portfolio need to be in order to generate an extra £1,000 each month? Let’s crunch the numbers.

Calculating income

One of the most common methods to earn a second income is to invest in a FTSE 100 index fund. After all, this gives automatic diversification and exposure to Britain’s largest and most mature enterprises.

The only downside is that with large-cap stocks nearing all-time highs, the yield offered by the FTSE 100 currently sits near 3.1%. And at this rate of payout, an ISA would need to be roughly £387,100 to generate £1,000 a month. Needless to say, that’s not pocket change. And while investors can build to this milestone over time through regular investing and compounding, there is a shortcut.

Instead of relying on index funds, investors can decide to pick specific dividend-paying stocks directly. With this strategy, a portfolio could yield closer to 6%, reducing the required capital from almost £400,000 down to £200,000.

Finding quality 6% yields

When exploring income stocks with high payouts, it’s critical to be vigilant. Investors typically rush to buy shares when dividends are a ‘sure thing’, pushing the price up and the yield down.

As such, when a stock offers a 6% payout, chances are it comes attached with increased risk. So how do investors avoid falling into traps?

In most cases, it all boils down to free cash flow. And right now, there are plenty of income stocks with excess earnings to offer, particularly in the real estate sector.

Becoming a ‘landlord’

One stock that’s caught my attention this week is Land Securities Group (LSE:LAND), more commonly known as Landsec. Why? Because the company has spent the last five years growing its dividend by an average of 11.7% a year, while its share price has been dropping, resulting in a tasty-looking 6.8% yield.

What’s going on? Landsec’s a real estate investment trust (RIET), which comes with tax advantages. It’s also a professional landlord. It owns and operates a portfolio of properties across Britain that are leased out, generating rental income, which is then used to service debts and pay shareholder dividends.

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.

Higher interest rates have taken quite a toll on the business, increasing its interest payments on debts while also hitting the value of its properties. The impact has been particularly problematic for its office assets, which have suffered even more due to the post-pandemic rise of remote working.

Yet, despite these headwinds, earnings in 2025 are actually growing. Management’s successfully renegotiating rents in lease renewals, while occupancy stands at 97.2% – the highest in five years.

The group’s leverage is substantial. Management’s making moves to exit offices, selling underperforming assets to shore up the balance sheet. However, this involves execution risk. And carried out poorly it could backfire and destroy shareholder value.

Nevertheless, given the high yield and improving fundamentals, the stock could be worth a closer look by investors seeking a chunky second income.

The post How big does an ISA need to be to target a £1,000 monthly second income? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Land Securities Group 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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