How much do you need in an ISA to make a second income of £1k a month?
Some believe generating a second income is the same amount of work as a second job. That’s not always the case. Through the stock market, an investor can earn passive income without requiring a lot of ongoing maintenance once the portfolio is set up. With tools to help make it even more attractive, I think it’s something worth considering.
The steps needed
A Stocks and Shares ISA is a valuable tool that many people can utilise. By using it to house the stock portfolio, an investor can benefit from favourable tax treatment. For example, if a stock pays a dividend, the proceeds within the ISA aren’t subject to dividend tax. That ultimately means the investor could keep more of the proceeds for their second income.
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.
In order to then build up to a £1k monthly income, the investor would need to spend some time buying dividend shares that they believe can offer sustainable cash payments in the years to come. There’s not much point in buying a company with a high yield now if the company is really struggling and could cut the dividend.
Most people don’t have a large lump sum to invest in one go. An alternative is to put money into the ISA each month. Let’s use £750 as an example. Based on the range of dividend yields currently available in the stock market, I think it’s reasonable to build a portfolio with an average yield of 7%. In this case, just after year 12, the investor could have a portfolio worth £171.4k. From this point, they could hit their goal of £1k (on average) in dividend income each month.
Of course, this isn’t guaranteed. Dividends can be cut at any time by a business. If the investor can’t invest £750 consistently, it could take longer.
A consistent payer
The portfolio needs to be filled with good income shares. One example for consideration is Invesco Bond Income Plus (LSE:BIPS). The stock has risen modestly by 2% over the last year, but boasts a dividend yield of 7.02%.
The fund aims to generate income for investors from buying “high-yielding fixed-interest securitiesâ. In practice, the managers buy bonds with high yields. As a result, when the bonds pay coupons, the fund can then pass on some of that as a dividend to shareholders.
Top holdings at the moment include bonds from Lloyds Banking Group, Morgan Stanley, and Aviva. So I can see clearly what is being held, and I don’t have to worry about money being invested in very risky companies that could default.
One reason I believe the dividend is sustainable is that bonds must pay out regular coupons to their holders. Unlike a dividend, the payment is mandatory, and if it’s missed, it essentially means the company is in financial distress. Therefore, if the income from the dividends comes from a reliable instrument, such as a bond, it provides some certainty.
A risk worth noting is that managers can still make poor decisions. If it lends money and the bond issuer defaults, it could hurt the overall performance of the stock.
Even with this concern, I think it’s an example of a stock that would fit in well with a second income strategy.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking 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.
