Creating a second income is entirely possible with a brand spanking new ISA, and a methodical approach.
Let me explain how I’d approach this!
Crunching numbers
Let’s say for the purposes of this article I have a brand new Stocks and Shares ISA. Within that ISA, I also have deposited my full £20K allowance for the tax year.
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.
I now need to find the best stocks with the ability to provide regular dividends as well as capital growth. This is the trickiest part, in my opinion.
As well as stock picking, I’m also going to set aside £300 per month to deposit into my ISA to help boost my pot.
Based on the additional income I want to achieve, I’m going to look to obtain a return of 7.5%, which is just higher than the FTSE 100 average in recent years.
If I implement this plan for 30 years, I’d be left with a total of £592,664.31. The next thing I’m going to do is draw down 6% annually, which equates to an annual second income of £35,559 for me to enjoy during my retirement years.
As a caveat, I’d like to reinvest my dividends. However, these are never guaranteed. Plus, the rate of return I’m hoping for may not materialise. Conversely, I could end up with a better than expected rate too!
Savings and retirement
One stock that could help me achieve my aims is Phoenix Group (LSE: PHNX).
The business is one of the largest firms of its kind helping consumers to plan for their golden years ahead.
With macroeconomic issues holding back financial services stocks, I’m not surprised to see Phoenix shares down 8% over the past 12 months. At this time last year they were trading for 552p, compared to current levels of 512p.
Phoenix’s mighty dividend yield of over 9% instantly drew me to the stock. It’s worth remembering that an ultra-high yield can be a sign of a business in trouble. One way to tell is when a share price is falling off a cliff, which isn’t the case here.
Next, as the UK population continues to age, and needs to think about how to enjoy retirement, Phoenix is in a perfect position to capitalise. This could help boost performance and returns.
Despite the recent difficult economic picture, the business updated the market on 1 February unexpectedly. A big part of the update was that it hit its cash generation target of £1.5bn two years early. This is a good sign from an investment perspective, at least for me as it can strengthen the firm’s balance sheet.
From a bearish view, performance can be impacted by economic shocks. For example, in the first half of this year, the business posted a loss of £245m. This was due to adverse market moves it took to hedge its capital position. Poor decision-making and adverse market conditions could dent performance, returns, and sentiment. I’ll keep an eye on this.
Phoenix is definitely the type of stock that could help create an additional income stream. I’d be willing to buy some for my ISA when I can.
The post £20K in a shiny new ISA? Here’s how I’d aim for an annual second income of £35,559 appeared first on The Motley Fool UK.
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Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
