How to turn a £20k ISA into a £21,260 second income

I dream of putting my feet up and living on a second income from dividend shares. With a bit of care, I think I can turn it into reality.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged black male working at home desk

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Who wouldn’t want a second income that we don’t have to work for?

I’m going for a Stocks and Shares ISA to try to do it. And my way is to buy stocks that pay good dividends.

And then I’ll reinvest my dividends every year to build up an ever-growing pot.

Should you invest £1,000 in Aveva Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aveva Group Plc made the list?

See the 6 stocks

To get an idea what kind of pot I could manage, I need to work out what annual return I might get.

ISA millionaires

There are more than 4,000 ISA millionaires in the UK right now. And the great majority of them have done it with a Stocks and Shares ISA.

Many owe their success to buying to- quality dividend shares.

Not every year will be a success, mind. But the UK stock market’s long-term average has beaten other forms of investment.

So, what about the kind of dividends I’ll need to get me a decent second income?

Reduce risk

There are some big ones out there now, but I have one main caution.

I don’t want to put all my money into one sector that’s paying the most cash, because that’s too risky. I’d hate to have been mostly in banks when the financial crisis hit.

So, I try to pick from a range of sectors to give me some diversification.

And starting now, I might split my ISA money between M&G, British American Tobacco, Aviva, Lloyds Banking Group, and National Grid.

Nice return

If I could use my full £20k ISA allowance, that would be £4k per stock. And my average dividend yield, based on forecasts, would come in at 7.7%.

That would beat even the best Cash ISAs today, when interest rates are super high.

But I might go for £2k per stock and pick 10 instead. So I might add Taylor Wimpey, Glencore, Land Securities, DS Smith and BT Group.

From those 10 stocks, my overall forecast yield would still come in at 7.3%. So it’s not a lot less, for much better diversification.

10 years

If I could keep doing that with £20k every year, my calculations suggest I could have a pot of £290k after 10 years. And that would get me £21,260 per year in dividend income at my 7.3%.

This does assume the same dividend yields each year, which is sure not to happen. There’ll be ups and downs. And some years will probably even lose money.

Stock and Shares ISAs lost an average 13% in 2019-20, for example. But the average total ISA return over the past 10 years has been 9.6%.

More safety?

Now, dividend returns like this are far from guaranteed. And I might go for lower yields but better cover by earnings in order to reduce my risk.

And it’s definitely for the long term. I wouldn’t invest in a Stocks and Shares ISA unless I could commit to at least 10 years.

Of course, to get maximum returns I’d have to never deviate from reinvesting all my dividends.

But that’s easy, and I’d never be tempted to keep some back for a holiday or some other treat. Well, hardly ever.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Aveva Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aveva Group Plc made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has positions in Aviva Plc and Lloyds Banking Group Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., DS Smith, Land Securities Group Plc, Lloyds Banking Group Plc, and M&g 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.

More on Investing Articles

Dividend Shares

Of the 20 highest-yielding FTSE 100 stocks, this is my top pick

This FTSE 100 stock currently offers a yield of 6.4%. But Edward Sheldon believes it’s capable of providing share price…

Read more »

Investing Articles

Could Tesla’s share price jump over the next 12 months? These analysts think so!

Tesla's share price has fallen by almost a third since 1 January. But optimism is high that Elon Musk's company…

Read more »

Investing Articles

I asked ChatGPT where the FTSE 100 will be in 6 months: here’s what it said…

Let’s be realistic, ChatGPT can’t predict the future. But it did do a good job of compiling data from brokerages…

Read more »

Investing Articles

Could the Rolls-Royce share price hit £10?

The Rolls-Royce share price has taken most analysts by surprise with almost everything going right for the British engineering giant.

Read more »

Investing Articles

4 REITs Fools own for passive income

REITs often have higher-than-average dividend yields compared to other stocks, making them a solid choice to consider for passive income…

Read more »

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »