See how much an investor needs in their ISA to earn a £499 monthly second income

Harvey Jones crunches the numbers to show how it’s possible to build a long-term second income by investing in a spread of FTSE 100 dividend stocks.

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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.

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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.

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Generating a second income from FTSE 100 shares is a great way to build financial security in retirement. Even better, using a Stocks and Shares ISA ensures that both the passive income and any capital growth from rising share values are tax-free for life.

Many don’t realise just how effective this strategy can be, so let’s crunch the numbers.

FTSE 100 dividends roll up over time

Aiming for a monthly second income of £499 means targeting an annual income of £5,988. The amount of capital required depends on the portfolio’s average dividend yield.

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While the FTSE 100 has an average yield of around 3.5%, I believe that a well-diversified portfolio of dividend-paying stocks could achieve a higher level of income than that. If targeting a 6% yield, an investor would need £99,800 to generate the desired target income.

That’s a big sum, but it can be built over time. An investor could hit the goal in 25 years by investing £125 a month in a spread of stocks with an average total return of 7% a year, roughly in line with the long-term FTSE 100 average. They’d do it in just 17 years by doubling their investment to £250 a month.

Land Securities Group looks decent value

One potential stock to consider for a dividend-focused ISA is Land Securities Group (LSE: LAND). As one of the UK’s largest commercial property developers and investors, it manages a diverse portfolio spanning office spaces, retail parks, and, more recently, residential properties.

The real estate investment trust (REIT) has faced headwinds from rising interest rates and the home working trend, which has hit demand for office space. Additionally, the growth of online shopping has impacted footfall at retail parks. These factors have weighed on the stock price, which is down 20% over five years and 10% in the last 12 months.

Created with Highcharts 11.4.3Land Securities Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

However, this downturn has pushed the stock to an attractive valuation, with a price-to-earnings ratio of just over 11. More importantly for income investors, the yield has now climbed to a hefty 7.07%.

This stock has a juicy 7% yield

While I don’t expect a major share price rebound to happen quickly given today’s uncertainties, the combination of a low entry price and high yield could make it appealing for long-term investors focused on income. The short term could be bumpy though.

When interest rates eventually ease and economic conditions improve, Land Securities could see stronger demand for its assets, potentially boosting its share price and securing those dividends. As with any stock, there are no guarantees.

Generating a £499 monthly second income through a Stocks and Shares ISA is achievable with a disciplined investment strategy. By focusing on dividend-paying stocks and reinvesting returns, investors can harness the power of compounding.

However, it’s crucial to diversify. While stocks like Land Securities offer high yields, they come with risks. A balanced portfolio with at least a dozen different stocks, and possibly a few more, can help manage volatility and reduce reliance on any single sector.

Over time, this approach should build a reliable second income stream. Just be prepared for some ups and downs along the way.

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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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Land Securities 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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