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A second income from the stock market can be a real lifesaver – it can help with bills if your hours are cut, cover emergencies, or just give you a little more breathing room each month.
In the UK, doing this within a Dividends and Dividends ISA is particularly powerful because your profits and gains are tax-free, so more money stays in your pocket.
A pot worth £175k
If you claim £950 a month, that’s £11,400 a year in dividends. To figure out how big a pot you need, you divide that by your target dividend yield.
Let’s say you target a yield of 6.5% (about 6%-7% ‘realistic but not crazy’). Required pot ≈ £11,400 ÷ 0.065 ≈ £175,000. So roughly, you’ll need around £175k in dividend paying stocks within your ISA to get £950 a month at a 6.5% yield.
If your average yield was slightly lower, say 5%, you would need closer to £228k, if it was slightly higher, you would need less.
How long would it take?
This sounds like a big number, but remember that you are not starting from zero and you are doing this in one year. For example, imagine investing £500 a month in dividend stocks in your ISA. In fact, you can easily target a total return (growth plus dividends) of around 7% per year over the long term.
Using compound growth, it would take around 18-20 years to get close to that £175k mark if you keep at it and reinvest the profits along the way. If you can put in £800-£1,000 a month, you could get there in a little over a decade, however, the markets will never move in a straight line.
One stock to start
Basic Health Structures (LSE: PHP) is a good example of the type of budget that some investors are looking at in this strategy. A real estate investment trust (REIT) that owns GP surgeries and primary care centers in the UK and Ireland. Most of the rent is subsidized by the NHS or government agencies, making the income stable.
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.
It paid a dividend of €6.6 per share last term and an annual yield of 7.6%. Its payout ratio is close to 96% of adjusted earnings.
The company has grown its dividends for decades, with small annual increases, most recently around 3%. Adjusted earnings per share (EPS) also increased by around 2%-3% annually, helped by modest rental growth and careful acquisitions.
On the numbers side, it generated net rents of around £153.6m in 2024, up around 3% year-on-year, and adjusted wages of around £93m, easily covering dividends.
Final thoughts
As with any investment, Basic Health comes with risk. Rising interest rates can suppress property values and borrowing costs. Also, it relies heavily on government-linked rents, so changes in health care funding or legislation could affect growth.
However, for a UK investor using an ISA to build a second income, it is worth considering. It has the kinds of features that many people love: long leases from strong tenants, fairly predictable rents, and low yields north of 6%.
