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Just what sort of money would need to be in an ISA to throw off a monthly second income averaging four figures?
The answer depends on the dividend yield the ISA earns.
Yield is how much a share pays in dividends each year, expressed as a percentage of its current price.
At the FTSE 100 yield of 2.9%, a £1k monthly second income (£12k per year in dividends) would need an ISA worth around £413k.
A higher yield would reduce the amount needed, though it is important always to focus on quality and value when buying shares, not zooming in on yield in isolation. No dividend is assured.
But say the yield was 6%. In today’s market I think that is achievable while sticking to blue-chip dividend shares.
At a 6% yield, it would take £200k to hit the second income target of £12k per year.
Compounding can help
Still, most people do not have £200k sitting unused in an ISA. Fortunately, it is possible to start with nothing and build up over time.
By compounding (reinvesting dividends), things could be sped up.
Say someone puts £20k per year into their ISA and compounds it at 6% annually. After eight years, it will already be worth around £198k. After nine years, the ISA would be well beyond the £200k target.
At a 6% yield, that would be enough to earn over £1k per month in dividends.
Choosing the right ISA
Hitting those targets requires the right level of contributions and also achieving the 6% compound annual growth target first and 6% yield target later.
Something that can eat into that is fees and charges levied by the ISA provider.
So it is worth taking some time when selecting a Stocks and Shares ISA.
Building an income portfolio
I said above I thought a 6% target dividend yield is realistic.
The income ought to come from a diversified range of shares. Think of that as basically not putting all your eggs in one basket.
One share I believe investors should consider at the moment is Pets at Home (LSE: PETS). The FTSE 250 share has a dividend yield of 6.5%.
It has not been an easy couple of years for the company. Its share price has halved over the past five years.
Getting the right product at the right price into stores has proven tougher than hoped, hurting profitability. Management is working on optimising the range and pricing for the shops but there is an ongoing risk they will keep getting it wrong.
Still, the shop estate is substantial and I do think its performance can be turned around. Meanwhile, Pets at Home also has a large and lucrative chain of vet practices. This side of the business is growing handily.
Pet numbers rise and fall to some extent, but there is clearly a large long-term market here. Many owners are willing to spend a lot to take care of their furry friends. Pets at Home has a strong market position, large customer base and loyalty scheme, and a well-known brand.
I own the share in the hope of price recovery. Meanwhile the chunky dividends are helping me earn a second income!
