Generating a second income is a popular financial goal today. This isn’t surprising as an additional source of cash flow can give one far more financial flexibility.
The good news is that creating a second income is a relatively easy process these days. With that in mind, here’s a look at how investors can do it within an ISA.
Passive income from stocks
One of the easiest ways to generate an additional source of income is to invest in dividend stocks.
These are stocks that pay investors a proportion of company profits, in cash, on a regular basis.
With these shares, one essentially gets paid an income for being a ‘part owner’ of the underlying business.
Many investment options
Now, within a Stocks and Shares ISA, one typically has access to a lot of dividend stocks.
That’s because, on the London Stock Exchange, there are literally hundreds of companies that pay dividends to their shareholders.
From well-known, ‘blue-chip’ companies like HSBC and Unilever, to smaller, more under-the-radar businesses like Impax Asset Management and packaging company Macfarlane, there are dividend payers everywhere.
And some of the yields (the dividend returns expressed as a percentage) on offer are very attractive.
For example, insurer Legal & General currently sports a prospective yield of around 9%. This means that if I was to invest £1,000 in the company, I’d potentially receive income of around £90 per year.
The key to dividend investing
Dividend investing is not as simple as just investing in the stocks with the highest yields, however.
You see, dividends are never guaranteed.
Ultimately, companies can cut, cancel, or suspend them at any time.
And it’s typically the highest-yielding companies that are most likely to do this, as these companies are often under pressure (the smart money has already exited the stocks pushing their share prices down and their yields up temporarily).
So, the key is to focus on high-quality businesses that are likely to pay out a consistent (and ideally growing) income stream going forward.
Income within an ISA
With that in mind, if I was looking to create a second income within an ISA today, I’d set about building a portfolio of high-quality dividend stocks.
In order to give myself the best chance of success (i.e., a growing income stream with minimal share price losses), I’d look for companies with:
- An attractive dividend yield (but not necessarily the highest yield out there)
- Relatively consistent earnings
- Strong balance sheets
- Good dividend track records
- The potential to raise their dividend payouts going forward
I could find most of this company information (and get some good investment tips) right here at The Motley Fool.
I’d aim to invest in at least 15-20 companies across different areas of the stock market (healthcare, consumer goods, financials, etc.). By diversifying my capital like this, I would reduce my overall risk levels.
Once I had put together a portfolio of top-quality dividend stocks, I’d sit back and let the income roll in.
