How much is needed in an ISA to target a £3,679 monthly second income?

Ever wondered what sort of second income could be generated by stuffing a Stocks and Shares ISA with shares that pay dividends?

The answer can be a substantial one!

£3,679 a month within 20 years

For example, say someone opens a Stocks and Shares ISA today and contributes £20k a year.

If that compounds at 6% annually, after 20 years the ISA ought to be worth over £735k. At a 6% dividend yield, that would be sufficient to generate a monthly second income of £3,679.

I am taking a long-term approach here, clearly. I am also assuming a number that is the same as the standard annual ISA contribution allowance.

The same approach could work with a smaller amount (or quicker timeline) but the monthly second income would be correspondingly smaller.

How to build a passive income portfolio using dividend shares

Above I mentioned shares that pay dividends.

In reality though, nobody knows whether a share will pay dividends in future. Some things can make it seem more likely — such as sizeable free cash flows, a stated aim to pay dividends and so forth – but that is not a guarantee.

So it is important to do your own research and decision-making when assessing what shares might be best for you – and keeping the ISA diversified, no matter how promising some shares may seem.

Setting realistic targets

Another point worth making is that I see the 6% compound annual gain as realistic, but it will require the right share selection.

Capital losses can eat into returns, while the current FTSE 100 yield is little over half of my 6% goal.

The higher the yield, the bigger the second income can be. But just chasing yield without looking at how sustainable a dividend is can be a costly mistake: for example, if a company cuts or cancels its dividend and then (as often happens in such situations) its share price falls too in response to the news.

Here’s a dividend share to consider

One FTSE 100 share I think merits consideration for its second-income-building potential is Aviva (LSE: AV).

The insurer cut its payout in 2020, proving the point I made above.

But it has since been growing it handily each year. I expect it to keep doing so if business performance allows, and as the yield is already a juicy 6.3%, that could be good news for shareholders.

Over the past few years, Aviva has pulled back from some overseas operations to focus mainly on its home market. It has built further scale in the UK market, for example by acquiring Direct Line. It is the leading general insurer by some distance, offering it economies of scale.

One risk I see is that very market strength. Its size means it is costlier for Aviva to fight price wars than for rivals with far fewer clients, so if one of them wants to try and grow it may compete on price, threatening profit margins for Aviva.

But with a customer base of over 22m in the UK, a strong brand and long experience in underwriting, I think Aviva is well-placed to generate lots of surplus cash in coming years. That could fund the dividend.

Should you invest £5,000 in Aviva Plc right now?

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Christopher Ruane does not hold any positions in the companies mentioned.