Image source: Getty Images
Is a second income of £600 a month possible from one year of investing in a Stocks and Shares ISA? However, the deposit limit is £20,000. Anyone who tops up their ISA will need a standard return of 36% to reach that figure (equivalent to £7,200 a year).
With the greatest of all FTSE 100 shares that remain around 8% and are the largest of all London Stock Exchange at around 13%-15%, it looks like we will need a different approach…
It’s no secret that one of the things that makes the difference in investing is seeing the money invested grow. If we can invest in wealth building companies in our ISA it is much easier to hit income targets. And the £20,000 annual cap is only available on deposits; if the income grows to £30,000 then it is still completely tax free even though we are over the limit.
Top prizes?
An increasingly popular strategy these days is investing in index funds. By taking the FTSE 100 index fund, I get exposure to 100 companies at once. And given Footsie’s performance in recent years, that £20k would rise to £30k from 2021.
Investing in individual stocks is another strategy – both high risk and potentially high reward. Every good stock you can own lately is Lloyds The bank. After some hard work, the price doubled, potentially turning that £20k into £40k within a few years.
This can lead to very good and very bad results. Participation Rolls-Royce shares in recent years can be worth more than 10 times. But the same role for the marketer WPP will be down 65% from last year.
To answer the question then: is £20,000 enough to earn £600 a month in an ISA? In the short term, no. For a few years and a few very good investments, then yes – although there are always risks attached.
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. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
One thing to consider
What kind of stock can help us reach our second income goal? Many of the best investments over the years have been in industries that have sold heavily and have fallen out of favor due to change. This is why I keep a close eye on FTSE 100 miners like this Rio Tinto (LSE: RIO).
Shares in the £90bn mining giant have been stagnant since the pandemic, until recently showing signs of health. The share price has increased by 60% in a year. And a price-to-earnings ratio of about 12 suggests it may still be cheap.
If the share price is struggling, that can be a warning sign. In Rio Tinto’s case, the past few years have been plagued by inflationary pressures and a slowdown in the Chinese property market that uses its raw materials. Both can be dangerous going forward.
But I see the long term very bright. Many of the metals that are mined, such as copper, cobalt, and iron are important as countries around the world develop their infrastructure to change the environment. I think it’s worth considering for those looking to build a second income in a Stocks and Shares ISA.
