Snapping up dividend stocks is a terrific way to make a sizable second income. And by doing it inside of a Stocks and Shares ISA, taxes don’t end up taking a bite out of an investor’s profits, even if the income stream grows into five-figure territory.
With that in mind, let’s explore how an investor can potentially build a £67.8k dividend income stream, starting from scratch.
Crunching the numbers
Looking at the FTSE 100, UK income shares typically provide an average yield of around 4%. However, by being more selective, a portfolio can easily generate a bit more without needing to take on too much extra risk. That’s especially true in 2024, where many FTSE shares continue to trade at cheap valuations.
Assuming the yield reaches 6%, if I’m targeting a £67.8k second income, I’d need a portfolio worth just over £1.1m. Needless to say, that’s not pocket change. However, when working on a long-term time horizon, achieving this milestone isn’t as unrealistic as it may seem.
Thanks to compounding, drip-feeding capital and reinvesting any dividends received creates a snowball effect. Let’s assume the same portfolio also delivers another 4% in capital gains in line with the stock market average. Under these conditions, investing £500 a month could reach this target threshold within 30 years. And the journey can be drastically accelerated for those capable of maximising their annual ISA allowance of £20k.
| Investing £500 per month | Investing £1,000 per month | Investing £1,667 per month | |
| Estimated time to reach £67.8k second income | 30 Years | 25 Years | 19 Years |
Obviously, there are some pretty lofty assumptions baked into these figures. When investing over decades, corrections and crashes are likely to emerge more than once and may disrupt a portfolio. This is especially true if such events decide to occur close to reaching the end goal.
In other words, investors may end up having to wait longer than expected before reaching a £1.1m portfolio and the associated £67.8k second income.
Best 6%-yielding stocks to buy now?
As previously mentioned, the FTSE 100 is home to a large array of income-generating companies. Arguably, one of the most popular would be Lloyds Banking Group (LSE:LLOY), which conveniently offers a yield of 6.1% today. Does that make it one of the best stocks to buy for a dividend portfolio? Not necessarily.
While the bank certainly has the yield, cash flow, and long-term demand we’re looking for, unfortunately its growth story leaves a lot to be desired. In fact, despite its popularity, the share price is actually down more than 20% over the last 12 months. And when zooming out further, the performance doesn’t exactly get much better.
However, Lloyds isn’t the only option out there. And investors don’t have to exclusively search within the FTSE 100 or at 6%-yielding dividend stocks. After all, there are plenty of other income-producing businesses offering lower yields but have the capacity to grow them over time.
