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Is a £600-a-month second income feasible from one year of investing in a Stocks and Shares ISA? Well, the deposit limit is £20,000. Anyone who fills their ISA up to the maximum is going to need a regular 36% return to hit that figure (the same as £7,200 a year).
With the largest FTSE 100 dividends sitting around 8% and the largest across the entire London Stock Exchange around 13%-15%, it looks like we’re going to need a different approach…
It’s no secret that one of the difference makers in investing is to see the cash invested grow. If we can invest in companies that build wealth in our ISA then it becomes much easier to hit passive income targets. And the £20,000 yearly cap is only on deposits; if the money grows to £30,000 then it’s still completely tax-free even though we’re over the limit.
Higher rewards?
An increasingly popular strategy nowadays is to put the money into index funds. By taking a FTSE 100 index fund, I get exposure to 100 companies all at once. And given the Footsie’s good performance in recent years, that £20k would have increased to £30k since 2021.
Investing in individual stocks is another strategy – with both higher risk and higher potential reward. A good individual stock to have owned recently is Lloyds Bank. After a terrific run, the share price has doubled, potentially turning that £20k into £40k inside a couple of years.
This has can lead to both very good and very bad outcomes. A stake in Rolls-Royce shares in recent years would be over 10 times in value. But the same stake in advertiser WPP would be down 65% in the last year.
To answer the question then: is £20,000 enough to earn £600 a month in an ISA? In the short term, no. With a few years and a few excellent investments, then yes – although there are always risks attached.
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.
One to consider
What kind of stocks could help us reach a second income target? Many of the best investments over the years are in oversold and unpopular industries due for a turnaround. This is why I’m keeping a close eye on FTSE 100 miners like Rio Tinto (LSE: RIO).
The shares in the £90bn mining giant have been stagnant since the pandemic, until recently showing signs of life. The share price is up 60% in around a year. And a price-to-earnings ratio of around 12 suggests it might be cheap still.
When a share price struggles, that can be a warning sign. In Rio Tinto’s case, the last few years have been dogged by inflationary pressures and a slowing down of the Chinese property market which uses its raw materials. Both could be risks going forward.
But I see the long term as being very bright. Many of the metals it digs up, like copper, cobalt, and iron are vital as countries around the world upgrade their infrastructure for the green revolution. I think it’s worth considering for those looking to build a second income in a Stocks and Shares ISA.
This story originally appeared on Motley Fool
