Here’s how I’d target a £2k annual second income from a £20k Stocks & Shares ISA

Our writer explains how he’d try to earn thousands of pounds annually in dividends by investing a £20k ISA in carefully chosen blue-chip shares.

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Earning a second income does not need to mean working more hours. In fact, what I see as a fairly simple way to earn a second income is using a Stocks and Shares ISA to buy dividend shares.

Of course, sometimes it can work better than others. Dividends are never guaranteed.

That is why I would spread my ISA over a few different companies and pay close attention to make sure I was buying into what I thought were solid businesses with attractive share prices and dividend prospects.

And if the approach worked, it could let me earn a sizeable sum each year without working for it. As an example, here is how I could target £2,000 in annual dividends from a £20k Stocks and Shares iSA.

Getting started

My first move would be to choose the Stocks and Shares ISA I felt best suited my needs. I would then put my £20k into it.

To find shares to buy, I would stick to industries I felt I understood. My preference would be for blue-chip companies with proven business models.

However, as past performance is not necessarily an indicator of what to expect in future, I would not get too worked up about firms’ dividend history. Rather, I would look at their dividend prospects.

It is worth adding that value would also come into the equation. After all, even if I earn juicy dividends along the way, I could still end up losing money if a share falls enough in price while I own it.  

A dividend share I’d buy

To illustrate the sort of share I would be looking for, I will use one I am eyeing for my Stocks and Shares ISA when I have spare cash to invest: Legal & General (LSE: LGEN).

The company operates in the financial services sector. I expect that to benefit from strong long-term demand. As an investor, I like the sector because the large sums of money involved mean that commissions can soon add up, while the effort of switching providers means many customers rarely move.

Legal & General has some advantages that help it do well. The brand is well-known, it has a large customer base and, in the past few years, it has become more strategically focussed on retirement planning and associated products, giving it more credibility in that field.

If markets tumble and policyholders start pulling out funds, that could hurt profits and the dividend might be cut. As a long-term investor though, Legal & General is the sort of FTSE 100 firm I would be happy to own in my Stocks and Shares ISA.

£2k a year in passive income

The firm has a dividend yield of 8.2%. At the moment, I believe I could build an ISA with an average yield of 8%. That is double the FTSE 100 average, but firms like Legal & General are ones I would be comfortable investing in.

That £20k invested at an 8% yield would earn me £1,600 a year in dividends.

If I compounded those dividends (reinvested them) for just three years, my Stocks and Shares ISA ought then to be throwing off over £2k annually in dividends.

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