Generating a second income can make a huge difference in retirement. I’m working towards that goal by investing in FTSE 100 and FTSE 250 dividend shares, inside a Stocks and Shares ISA. These give me both potential capital growth and regular dividend payments. Better still, they’re all free of UK tax. So how much would an investor need in their ISA to generate a passive income of, say, £7,777 a year?
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A 4% withdrawal rate
Under the 4% withdrawal rule, taking that percentage of your portfolio each year should ensure the underlying capital never runs dry. It’s a rule of thumb rather than a guarantee. To generate £7,777 a year at that rate would require a portfolio worth approximately £194,425.
That’s a substantial sum, but time and compound growth can help you get there. Let’s suppose you have 30 years before retirement, your investments grow by an average of 8% a year, and you increase your contributions by 3% annually. You could target that pot by investing just £100 a month in year one.
These figures are illustrative, not a forecast. Stock markets can fall as well as rise, and investment returns are never guaranteed. Inflation, fees and the timing of withdrawals will also affect your eventual income.
The FTSE 100 and FTSE 250 offer plenty of dividend-paying businesses to explore. The trick is to find companies with the financial strength to sustain their payouts, rather than simply chasing the biggest headline yield.
Dividends and growth too
Insurer and asset manager Standard Life (LSE: SDLF) offers one of the most impressive yields on the entire FTSE 100, and it looks sustainable. It’s forecast to yield 6.23% across the 2026 financial year, rising to 6.47% in 2027. That’s the beauty of dividends. Most companies aim to increase them year after year, preserving or boosting their real value. Standard Life has increased its shareholder payouts every year for the last decade.
The board intends to increase the dividend by 2% a year in future. That’s lower than today’s inflation rate, which means the dividend may fall in real terms. But given the high starting point, it’s not the end of the world.
Standard Life is primarily seen as a dividend stock but lately it has delivered some impressive capital growth too. Its shares have climbed 35% over the past year and more than doubled over three years, from 445p to today’s price of 927p.
There’s no guarantee that Standard Life will continue to perform so well, especially given today’s uncertain stock market. After its strong run, the shares are more expensive than they were, with a price-to-earnings ratio of 16.9. It operates in a competitive market where rivals have to slug it out over new sources of income.
Yet I think Standard Life is still worth considering as part of a diversified spread of UK shares. Check out this FTSE 100 income stock too. It yields a stunning 7%…
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Harvey Jones owns shares in Standard Life.
This story originally appeared on Motley Fool
