If I wanted to build a second income from stocks, then investing in UK shares through a Stocks and Shares ISA might be the best way to go about it. Here’s how I’d target a second income of almost £14k a year.
£100 a month
First, I’d open a Stocks and Shares ISA account with a reputable broker. This crucial step allows me to invest in stocks tax-free up to a limit of £20,000. Now, £20k a year is a big chunk of money. It’s about £1,700 a month. But I don’t think I need anywhere near that to earn a big passive income.
Let’s say I started with no savings and only £100 a month to build my second income. Even on that smaller amount, I can start earning dividend income from UK shares in my ISA almost straight away. And of course, no taxes are paid on any returns from the account. I keep 100% of whatever I make from the stock market.
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.
Bumper passive income
So, what kind of return should I expect from that money I’m putting in? For a safer, dividend-heavy portfolio, I might expect something like 5%-7% per year. The shareholder payouts from a lot of FTSE 100 companies are around this or higher already.
If I was looking to take on more risk, I could reasonably expect an 8%-10% return from UK shares. This amount is around the average historical return of FTSE 350 companies. That’s a tidy figure and can lead to a nice passive income all on its own. But the real magic here comes from taking those returns and reinvesting. This way, the cash amount I get back in my ISA each year benefits from compound interest. Here’s what that could look like.
| Yearly second income | ||
| 6% return | 9% return | |
| 5 years | £356 | £562 |
| 10 years | £882 | £1,512 |
| 20 years | £2,529 | £5,220 |
| 30 years | £5,479 | £13,999 |
I worked out these figures using a simple investment calculator – found easily online. And I plugged in £100 a month for the given percentage return and time periods. I’ll mention here that inflation will make these amounts seem lower in the future. Also, investing in companies is risky and any return I get isn’t guaranteed and is likely to fluctuate.
That said, I feel the amounts in that table highlight the power of investing in UK shares through an ISA. Only £100 a month can turn into a yearly income of £13,999. And while that assumes a strong returns rate, I can increase my investments as my career progresses to boost my chances of meeting it or earning more.
In fact, brokers have revealed data that shows thousands have already invested their way to a £1m in these ISA accounts. That’s a lofty goal, but if I could reach it then I’d need only 4% per year to get a £40,000 return. That’s why I’m very happy to invest in shares with my eye on a future second income.
This post was originally published on Motley Fool
