Turning a £20k ISA into a second income worth £1,500 a year!

Many of us invest for a second income. Some of us want that second income now, others want to generate wealth with the aim of drawing it in later life.

But today, I’m not looking at compounding returns over the next few decades. Instead, I’m looking at how I could turn a fully-utilised £20k ISA contribution limit into an income worth £1,500 a year.

So how can I do it? Let’s take a look.

Second income generation

If I wanted to generate an income worth £1,500 a year from a £20,000 investment, I’d need to invest in stocks averaging a 7.5% dividend yield.

Normally, that might not be easy. However, the stock market correction in March certainly helps. That’s because when share prices go down, dividend yields go up.

So with share prices in certain sectors, notable financial stocks, falling as much as 20%, we’ve seen considerable upward movement in dividend yields.

Stocks have fallen on the back of the Silicon Valley Bank fiasco. The tech financier was forced to sell bonds at losses when depositors wanted their money back. This generated fear that spread throughout the market, although it seems almost entirely unwarranted.

And it’s important to note that the dividend yield at the time I buy the stock is the dividend yield I will receive going forward, regardless of changes in the share price. But changes in the dividend itself will impact my yield.

But, naturally, I need to invest in sustainable dividend yields. Sometimes a big dividend is a warning.

Stock picking

The above is great in theory, but I need to pick the right stocks. I’m looking to average a 7.5% dividend yield across my investments. So let’s see which stocks could do the job.

These are just some of the highest yielding stocks listed in the UK. Several of which are in wealth management, investment, or insurance. This is one of the areas hardest hit by the selloff in financial stocks in March.

I actually have holdings in all of the aforementioned stocks, with the exception of Steppe Cement — a Kazakh company that offers a huge dividend but also has a large spread between the buying and selling price. I’ve been looking for an opportunity to add this stock to my portfolio in recent months.

Sociedad Química y Minera — the Chilean lithium miner — has proven to be more volatile than I had hoped, but I’m looking to buy more of the stock as the share price pushes downwards. The global economy may be slowing, but long-term demand for lithium will be strong — it’s integral to the green agenda.

Aviva, Legal & General and Phoenix Group are among my favourite picks right now. I’ve either bought more or I’m looking to buy more of these stocks. These financial services firms trade with valuations far below the index average. There are concerns about the impact of market volatility and bond valuations, but these are strong, resilient businesses.