Turning a high-yield ISA portfolio into a £35k+ yearly second income

If I wanted to enjoy a meaningful second income from stocks, then building a high-yield dividend portfolio in a Stocks and Shares ISA might be a smart way to go about it. Here’s how I might target eventual passive income of more than £35,000 a year.  

£75 a week

First, I’d get the ball rolling by opening a Stocks and Shares ISA account with an established investment platform. This would allow me to invest tax-free in stocks up to the current limit of £20,000 a year.

Clearly, investing that full contribution amount every year could quickly begin to build serious wealth. But maxing out the annual limit might not be possible when I first begin saving and investing.

The good news though is that I don’t actually need to invest so much to still earn very decent passive income.

For example, let’s assume I start with no savings but commit to investing £75 a week — the equivalent of £3,900 a year — in high-yield dividend stocks. After just a few months, I would likely start seeing passive income trickling in.

And that’s without the headache of calculating how much tax I might owe. Whatever flows into my ISA account is mine to keep — 100% of it!

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.

High yields

So, what kind of annual return could I be looking at from my invested money? Well, the minimum I should expect is the FTSE 100 average dividend yield, which right now stands at 3.7%.

That’s admittedly not so impressive now that interest rates have shot up. However, many individual FTSE 100 dividend stocks are currently yielding far more than this 3.7% average. Some shares now carry yields in the 8%-10% range.

So, I could build a dividend portfolio and reasonably expect something like 6% in passive income per year. If I wanted to take on more risk, I might be able to generate an 8% return from UK shares.

From a stream into a torrent of passive income

These are decent levels of passive income as it is. But if I instead choose to reinvest my returns back into the market, then I begin to harness something very powerful. My ISA portfolio would start to benefit from compounding returns. That is, I’d earn interest on interest.

Here, I’ve assumed an 8% return, which is approximately the average historical return of FTSE 350 companies (with dividends reinvested). The end result could be a £441,804 portfolio with an 8% yield generating me £35,344 in passive income!

Now, I should caution that these past returns aren’t assured. They’re just historical averages. Plus, I should always be mindful that the purchasing power of money deteriorates over time. I think we’re all too aware of this nowadays with high inflation.

That said, the fact that investing £75 a week could one day turn into a yearly second income of £35k+ is very inspiring. It certainly keeps me motivated to carry on investing in UK shares in my own ISA.