A Stocks and Shares ISA is a great way to build a secondary income. But it’s not a night job. It takes time and patience. Sticking to it, making monthly contributions, and putting in a lump sum as the deadline can build a lot of wealth over time.
That wealth can generate much more income than most people imagine, often without touching the underlying income, which can be left to grow.
In my opinion, one of the best ways to do that is by investing in broadcasting FTSE 100 again FTSE 250 stocks, especially those that pay regular dividends.
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FTSE 100 income
Dividends are cash payments that companies make to shareholders as a reward for holding their stock. It means that even in years when the share price goes nowhere, or falls, investors still get something in return. They are usually paid twice a year, sometimes quarterly. Although the split may seem small at first, it builds up gradually over time, especially if investors automatically invest the entire payout to buy more shares and compound their returns.
That reinvestment can turn a market downturn into a profit, as investors buy more stocks when prices are low.
But generating a second income of £25,000 a year still requires a lot of money. If the portfolio yields 4%, the investor would need a pot worth £625,000 to generate that level of income.
It is possible to identify the highest yield. One of my favorite FTSE 100 stocks is insurance Phoenix Group Holdings share price (LSE: PHNX), which currently has a high trailing yield of 7.25%. At that rate, an investor would only need about £345,000 to generate £25,000 a year.
Phoenix’s share price has delivered growth recently as well, rising 50% over the past year. But I would never suggest putting the whole ISA in one stock. That is simply too dangerous.
Phoenix stocks are flying
If profits or cash flow come under pressure, dividends can be cut or withdrawn. Individual stocks can also fluctuate. Ideally, investors should build a diversified portfolio of at least 10 stocks to spread risk across different sectors and business models.
Phoenix wouldn’t make a bad place to start. I hold back and think it’s worth considering from a long-term perspective. It has increased its shareholder payouts for nine consecutive years, raising its dividend per share from 41.75p in 2016 to 54p in 2024. That’s average growth of about 3% per year, although forecasts suggest the pace may slow to about 2% per year in the next few years. Given the early first crop, that still looks attractive.
As with any stock, there are risks. Phoenix operates in a competitive market and must continually acquire new business. A decline in the stock market will also affect the value of the assets backing its insurance liabilities.
Yields attract attention, but high yields often indicate greater risk. For me, Phoenix would sit best as part of a wider portfolio of quality FTSE 100 income stocks within a Stocks and Shares ISA. There are many other strong dividend payers out there, so it pays to do some homework. The 5th April ISA deadline is fast approaching, so there is no time to lose. That second stream of money will never build.
