How much do you need in an ISA for a £36,000 second income?
Want to earn an extra £36,000 second income entirely tax-free? It might sound too good to be true, but a growing number of ISA investors are turning this dream into a reality.
With the UK stock market delivering an average total return of 8% a year, drip feeding just £500 a month into an ISA could be all it takes to start eventually earning a five-figure passive income. And those who start early can go on to earn a lot more. Hereâs how.
Aiming for £36,000
Looking at the FTSE 100 today, passive index investors can expect to earn a dividend yield of roughly 2.9%. And at this level of payout, earning £36,000 a year will require a pretty massive portfolio worth £1.24m.
However, for stock pickers, the required threshold is significantly lower. By building a custom ISA portfolio, even at todayâs valuations, it isnât too tricky to generate a 5% annual yield. And at this rate, the required portfolio size drops to £720,000 â thatâs £520,000 less!
Of course, not many people have close to three-quarters-of-a-million pounds just lying around. But the good news is, even a modest investor can still build this required wealth over time.
By investing £500 each month in line with the stock marketâs average 8% rate, this threshold can be hit within around 29 years. And after close to three decades of compounding, the challenge now becomes finding high-quality dividend stocks that pay a 5% yield.
Income opportunities in 2026
Looking across the FTSE 350, there are over 60 stocks with a yield of 5% or more in January. And among these stands Aviva (LSE:AV.), which continues to offer a fairly chunky 5.5% payout, even after climbing close to 40% in the last 12 months.
The insurance giantâs been on a bit of a rampage in recent years. With rising interest rates sparking fresh life into the pension risk transfer market, driving up demand for the firmâs annuities. And with management leveraging its financial strength to execute the takeover of Direct Line, the companyâs seemingly on track for another strong year.
Avivaâs currently aiming to deliver an 11% average earnings per share growth rate by 2028 while simultaneously boosting its return on equity all the way to 20% through improved profit and free cash flow generation.
Thatâs definitely good news for income investors since profit and cash flow are ultimately what fund dividends. However, even the most promising investments have their weak spots. In the case of Aviva, thereâs significant execution risk when it comes to integrating Direct Line.
Large-scale acquisitions and mergers come with all sorts of unexpected complexities. And if the anticipated synergies and savings fail to materialise or surprise costs start to spiral, the company could fall short of its medium-term targets.
Even if integration goes without a hitch, claims inflation driven by US tariffs, particularly for motor insurance, could nonetheless offset savings, compressing margins in the process.
Nevertheless, with an impressive track record and a business model thatâs becoming increasingly capital light, I think Aviva shares may be worth investigating further. And itâs not the only second income-generating opportunity Iâve got my eye on right now.
The post How much do you need in an ISA for a £36,000 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 no position in any of the shares mentioned. 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.
