How I’d invest my £20k ISA to earn a second income of £250 a month

It’s amazing how much of a second income investors can unlock with a £20k ISA when picking stocks directly rather than relying on index funds.

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Despite the stock market enjoying a rally in 2024, there are still plenty of investing opportunities to secure a chunky second income. Across the FTSE 350, roughly 70 stocks are currently offering a dividend yield of at least 5% or more. And just under 80 businesses are sitting on a consecutive dividend hiking track record of at least five years or more.

In other words, there continue to be tremendous income opportunities to capitalise on. And in the long run, investing the £20,000 annual ISA allowance today could yield more than £250 a month passively. Here’s how.

Terrific income opportunities

Historically, the FTSE 100‘s offered a dividend yield of around 4% a year. But rather than injecting money into an index fund, investors can get a bit more selective by picking individual stocks directly.

There’s no denying this investing approach comes with greater risk and requires far more effort in terms of research, analysis, and portfolio management. However, when executed successfully, it opens the door to far more impressive returns and passive income potential.

Consider home renovation business Howden Joinery (LSE:HWDN). The company’s a vertically integrated designer and supplier of fitted kitchens that works directly with tradesmen and contractors. As houses in the UK continue to age, demand for home renovation has increased over the years. And it’s a tailwind that Howden’s been busy capitalising on.

Right now, shares offer a fairly unimpressive dividend yield of 2.4%. However, while this payout doesn’t look impressive today, it might steadily change over time.

Why? Because since 2013, dividends have increased by almost 300%. And consequently, investors who bought and held shares 10 years ago are now earning an annual yield closer to 8%, as well as reaping a total shareholder return of 252% over the same period.

In other words, a £20,000 ISA back in 2013 would now be worth close to £76,000 with Howden-like returns versus the £37,960 that would have been earned with a FTSE 100 index tracker. Following the 4% withdrawal rule that translates into a second income worth £3,040 (just over £250 a month) versus £1,520.

Nothing is risk-free

Howden Joinery’s growth potential still looks strong, in my opinion. Management has been heavily investing its in infrastructure to support greater capacity and demand, as well as recently expanding into the realm of fitted bedrooms and international markets.

However, penetrating new opportunities and regions comes with its own set of challenges that might make it quite difficult for Howden to maintain its historical momentum. In other words, there’s no guarantee it can continue to deliver impressive share price and dividend performance.

Nevertheless, it serves as an excellent example of how, when stock picking is executed correctly, investors can significantly improve their financial prospects and earn a chunky second income.

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.

Zaven Boyrazian has positions in Howden Joinery Group Plc. The Motley Fool UK has recommended Howden Joinery 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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