How I’d invest my £20k ISA to earn a second income of £125 a month

It’s amazing how much of a second income I could generate if I was in a position to max out my ISA portfolio at today’s prices.

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The current stock market crash is a brilliant opportunity for investors like me, who are looking to generate a second income by investing in dividend-paying FTSE 100 shares.

It means that strong, solid UK stocks are falling in value for no fault of their own, having been caught up in a wider sell-off triggered by Silicon Valley Bank in the US, Credit Suisse in Switzerland, and as of today, Germany’s Deutsche Bank.

Top UK stocks are now selling at reduced prices while their dividend yields are higher, too. Yields are calculated by taking a company’s dividend per share and dividing it by the share price. If the stock falls, the yield rises.

A great time to buy dividend stocks

With London’s blue-chip index down 7.8% since the start of last month, to 7,376 at time of writing, loads of juicy yields are now even juicier. A quick headcount shows that six FTSE 100 stocks now pay income of more than 5% and 6%, while another dozen yield 7% or more.

Sadly, I don’t have £20,000 to invest in a Stocks and Shares ISA by 5 April, having blown my budget by going on a shopping spree last October, when the index dipped below 6,000. I’ll still invest every penny I can in the days ahead, though.

If I did have the full £20,000, I would pile into the higher end of the income scale, and look to generate an average yield of 7.5%.

I reckon I could do that without taking on too many risks, provided I did two things. First, I’d diversify by buying least five different companies, across different sectors. Second, I’d aim to hold onto my purchases for the long term, by which I mean 10 years and ideally a lot longer.

There are always risks when buying company shares. Any stock can fall, at any time. Even multi-billion-pound FTSE 100 giants. Dividends are never guaranteed. If a company’s revenues or cash flows fall, management will have no choice but to cut shareholder payouts.

Spreading my risk across five stocks

However, with the Bank of England saying inflation will soon start falling and that the UK should avoid a recession, that’s a risk I’m happy to take today.

The following five companies all yield more than the 7.5% income I need to hit my target of £1,500 a year from £20,000, which boils down to £125 a month.

Mining giant Rio Tinto currently yields 7.56%, British American Tobacco yields 7.71%, housebuilder Barratt Developments yields 8.3%, insurer Legal & General Group yields 8.46%, and asset manager M&G yields 10.77%.

If I split my money into five equal chunks of £4,000, I would secure an average yield of 8.56% from these fabulous five income stocks.

That would give me £1,712 in my first year, which works out as a second income of almost £143 a month. That is £18 a month over my target.

With luck, my income would rise over time, as these companies raise their profits and dividends. As ever with investing, there are no guarantees, but this looks like a great way of generating a high and (hopefully) rising passive income in retirement.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has positions in M&g Plc and Rio Tinto Group. The Motley Fool UK has recommended British American Tobacco P.l.c. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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