How much would an investor need in an ISA to make £650 a month in second income?

Making second income from stocks is not a difficult dream. I do, and I know many other investors who do the same. However, for the investor starting out with an empty Stock and Shares ISA, there is some work that needs to be done to try and build dividends up to the point of making £650 a month.

Using an ISA

First, the ISA needs to be set up. It is possible to build a second income without one, but holding stocks within this investment account is very tax efficient. If an investor receives a dividend or sells stock to make a profit, the proceeds are not subject to tax in an ISA. This means that more money can be saved, thus speeding up the portfolio building process.

In terms of funding an account, there is a limit of £20k per year that can be invested in an ISA. Some may find it easier on the income to invest the amount per month, rather than adding £20k once a year. Of course, no one is forced to invest £20k. But if the investor approaches this figure it helps to speed up the process.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

Dividend stock selection

With the money ready to be sent, the focus now turns to choosing good equity shares. As a note, choosing a high-yielding stock is not always the best. A high yield can be caused by a falling share price, which means that the dividend may not be sustainable.

Instead, considering an option that offers less can be realistic. For example, i Company valuation Equity Income Trust (LSE:AEI). The investment trust paid a dividend of 7.25%.

An investment manager (abrdn) aims to provide a high level of income by selecting a wide variety of dividend paying stocks. It is a good option to consider as it requires a lot of effort in researching individual opinions, as well as reducing the hassle and transaction costs of buying all the stocks individually.

Currently, the company has a lot of exposure to UK stocks. The largest weighting is in financial services at 43%, followed by energy at 18%. The maximum number per person is Imperial Brands.

One danger here is the all-or-nothing stylistic reliance. If an investor doesn’t like some of the holdings, they can’t pick and choose what the investment manager includes in the trust.

Reaching the goal

Making £650 a month, is not something that will happen overnight. Assuming an investor can invest £20k a year in a portfolio of shares with an average yield of 7%, I can make some predictions.

After four years, the investment pot would be worth £115.5k. This would mean that in the following year, it would bring in a second income of £674 per month.

If the investor invests less money per month, the time may be longer to reach the goal. Of course, these are just predictions and should be taken with a pinch of salt, but it shows potential!