Use £20K to earn a £2K annual second income within 2 years? Here’s how!

Christopher Ruane outlines how he’d target a second income of several thousand pounds annually by investing in a Stocks and Shares ISA.

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A second income and a second job do not have to go hand in hand.

If I wanted to earn some extra money on a regular basis without working more hours, one approach could be investing in shares I expect to pay me dividends for owning them.

As an example, if I had a spare £20K, I would put it in a Stocks and Shares ISA and invest it like this to target a £2K second income annually after just two years.

By the way, the same approach could work with a lot less than £20K too, though if I invested less money my likely income would fall proportionately.

Aiming for a target

Let’s start with the end in mind.

Earning £2,000 per year from a £20,000 ISA could come from a dividend yield of 10%.

There are some FTSE 100 shares that have such a yield, including M&G, Phoenix and Vodafone (although it has announced plans to cut its dividend).

But 10% is an unusually high yield, as the coming Vodafone cut suggests.

An alternative approach would be earning an average 8.5% yield and compound the dividends for two years. At that point, my ISA would be earning me a £2,000 annual second income.

Focus on quality and value

Still, an average 8.5% yield would not be my criterion for choosing shares to buy. After all, no dividend is ever guaranteed.

Instead I would be looking to buy into great companies with attractive cash generation potential (as cash can fund dividends) and attractive share prices. Only if I found such shares would I then consider their yield.

One share I’d consider buying

As an example, consider Legal & General (LSE: LGEN). If I had spare cash to invest, I would happily buy it as a way to boost my passive income.

The firm operates in a market (financial services) I expect to benefit from resilient high demand over the long run. Its iconic brand, large customer base and distinctive investing ethos help to set it apart from rivals. That can be good for profits – and dividends.

In fact, Legal & General has been a solid dividend payer. The last time it cut its payout was during the 2008 financial crisis. Within a few years it had surpassed its level before the cut — and has grown almost every year since.

The business does face challenges. Asset price movements can hurt earnings. Poor-performing stock markets could lead clients to withdraw funds, denting profits.

Still, I see Legal & General as a promising second income pick for my portfolio. The FTSE 100 share yields 8.4%.

Building income streams

This approach does not strike me as complicated, or hard work.

I am essentially identifying proven businesses I think have strong long-term income generation potential, then considering whether to buy them and hopefully earn dividends on the back of my purchase.

Doing that, I think £20K could earn me a £2K second income annually after just a couple of years.

If I choose well, I may also benefit from growing dividends, meaning my second income could grow over time without putting any further money into my ISA.

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.

C Ruane has positions in M&g Plc and Vodafone Group Public. The Motley Fool UK has recommended M&g Plc and Vodafone Group Public. 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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