£10k in an ISA? I’d use it to aim for an annual £1k second income

Want a second income without having to take on a second job? With a bit of money up front, and a bit of time, it can be done.

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A second income can really help with rising bills these days. And there’s a way to aim for it, without taking on a second job.

But it needs a bit of money to set up and, ideally, a few years to get going. I’m talking about buying shares in UK companies that pay good dividends.

Windfall

If I had a £10k windfall, I could invest it all in Phoenix Group Holdings (LSE: PHNX) shares. Phoenix is an insurance and investment firm specialising in managing closed life and pension funds.

It’s on a forecast 10.8% dividend for this year. So I could plonk down my £10k, then sit back and pocket £1,080 a year in dividend cash. Easy, right?

But you might be thinking, wouldn’t it be nuts putting our money all in this one stock, and just assuming all will be fine and we’ll get our dividends?

Well, yes, it probably would.

Risky business

Dividends aren’t guaranteed. And this year’s 10% might not happen. The insurance and investment business is also risky. And it can go through bad times, just like after the 2020 stock market crash.

So there’s no dividend guarantee. And I’d rate Phoenix Group as a riskier investment than a lot of others on the FTSE 100.

So what can we do? For one, I focus away from the biggest dividends as they can be the least certain. As an example, Vodafone has been paying more than 10%. But that will be slashed in 2025, as the company tries to turn itself round.

Show me the cash

The key thing for me is to find companies with sustainable dividends, in strong cash-cow businesses, and with long track records of raising their annual payments.

Take National Grid. It’s lifted its dividends for more than 25 years, and it sure looks like a long-term essential business to me. It’s a regulated industry though, and it faces changing demand and energy sources, so it still has risk.

But I’d rate National Grid’s forecast 5.4% yield as less risky than the 10.8% at Phoenix. Of course, it wouldn’t get me my £1k a year from a single £10k investment. More like £540.

Diversify

But here’s a thought. What if I split the money between the two? I could get an overall yield of 8.1%, with the risk somewhere in the middle. And I’d have a bit of safety in case one of them hits a rough patch.

And I’d just extend that. Maybe put £2k into each of five stocks, in different sectors. Or £1k in each of 10.

I wouldn’t get as big a yield as picking the single top one. So I’d have to settle for less than that £1k a year. Or, better still, keep investing my dividends in more stocks, add as much extra as I can each year, and keep going for as long as I can.

More than £1k?

I reckon I could get to a second income of a fair bit more than £1k a year that way… with a bit of patience.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended 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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