Building a reliable second income from the stock market is more achievable than many people think. And using a Stocks and Shares ISA wisely can also make the whole endeavour beautifully tax-free.
By directing regular monthly savings into high-yield dividend shares, investors can steadily build a nest egg that pays out without HMRC taking a slice.
One of the toughest things for investors to wrap their heads around is how to actually get started. So, I thought I’d dive into some of the numbers and mechanics behind the passive income dream.
Running the numbers
To generate £5,200 a year, or the equivalent of £100 a week, an investor needs a portfolio yielding roughly 7% to be worth £74,285. That sounds like a tall order, but it doesn’t need to arrive all at once.
Assuming a total return of 9% a year, an investor putting in £500 a month would reach that threshold in around eight and a half years. That timeline could shrink further if markets cooperate or contributions increase.
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.
A high-yielder to consider
One stock that income-seekers may want to research is FTSE 100 stalwart Legal & General (LSE: LGEN). Most investors will have a passing familiarity with the brand as it’s one of Britain’s biggest financial services companies.
The company has a strong market position in the sector across everything from workplace pensions and annuities to asset management. What may be less widely appreciated, however, is its dividend yield. As I write on 13 March, it’s sitting at a tidy 8.8%.
That kind of yield goes a long way towards chipping away at that £74,285 target. It also means the company is paying out considerably more than the Footsie average, which is hovering nearer to 3.5%.
That said, abnormal figures always deserve scrutiny. Legal & General’s yield is head and shoulders above many in the market. Partly, this is driven by the sector and strong cash flow. However, investors banking on a long-term second income would want to dig into this further.
There isn’t much in the way of capital gains, either. The stock is down 7% in the last five years and 1.3% since the start of the year.
Putting all the eggs in one basket
A concentrated portfolio can take a painful hit when markets get choppy. Spreading investments across a range of sectors and companies can help smooth out stock-specific risks considerably.
A well-diversified basket of dividend payers, built up gradually inside a Stocks and Shares ISA, tends to be a more resilient approach than chasing the highest yield on offer at any given moment.
Legal & General is a high-yield dividend stock that might be worth a closer look for investors. But that’s just one component of a broader portfolio rather than the silver bullet to deliver a steady second income.
