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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!
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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.
| Annual passive income | ||
| 6% return | 8% return | |
| 5 years | £1,170 | £1,560 |
| 10 years | £2,340 | £3,120 |
| 20 years | £4,680 | £6,240 |
| 30 years | £7,020 | £9,360 |
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.
| Total balance | |
| 1 year | £3,900 |
| 5 years | £22,879 |
| 10 years | £56,947 |
| 20 years | £178,471 |
| 30 years | £441, 804 |
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.
