£10k in an ISA? I’d aim to invest it for a second income of £1k a year

Here’s how I’d aim to make an upfront investment to generate an annual second, unearned income from these shares.

| More on:
Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares can be decent vehicles for passive second income because of their dividends.

But is £1k a year too much of a stretch when investing £10,000? After all, a stock would need to yield 10% to produce that, and not many companies can.

In fairness, I wouldn’t expect to get that much immediately. However, it may be close.

Big dividends and volatility

For example, well-known and popular dividend payer Legal & General (LSE: LGEN) has a share price near 228p (26 June). At that level, the forward-looking dividend yield for 2025 is just over 9.6%.

Putting all the money in the stock would generate a total annual dividend worth about £960. However, the trading costs would eat into that return a little in the first year, but not much.

Why is Legal & General’s dividend yield so high though? In one rule of thumb often used by investors, any yield above 7% might be signalling risks as well as opportunity.

Perhaps the biggest uncertainty is the company operates in the financial sector, which is known for its cyclicality and volatility.

Cyclical firms often see their profits wax and wane as the general economy goes through its usual boom and bust gyrations.

That’s why the company’s valuation always seems to look so low and attractive – and the dividend yield so high. It’s the stock market’s way of pricing in the possibility of a collapse in earnings, cash flow, dividends and the share price ahead.

To be honest, I expect the market will be correct one day. However, that wouldn’t put me off investing in the stock now. Although cyclicality’s a big ongoing risk that may cause me to lose money on the stock.

I reckon we may be in the early stages of an enduring period of multi-year prosperity for the economy, individuals, businesses and companies. So to me, Legal and General looks like a decent stock to research and consider right now, despite the risks.

Aiming to manage the uncertainties

That said, there’s no way all my eggs would go in the one basket. £10,000 doesn’t come available to me every day, so I’d aim to be careful with it by embracing the stock-pickers friend – diversification.

In other words, I’d spread the investment over several stocks with attractive-looking dividend prospects. For example, my watchlist includes names such as energy company National Grid and supermarket chain J Sainsbury.

I like them, but it’s worth me remembering all businesses and stocks come with risks as well as opportunity. Therefore, my plan would be to dig in with thorough research before buying in an effort to try to reduce the effect of some of the worst investment howlers I could make!

Finally, I’d play the long game with my investing. The process of compounding is one of the main factors that could help to build the value of my portfolio’s dividend income.  So I’d reinvest dividends along the way so the dividend stream hopefully expands over time.

That would be my plan for getting to an annual second income of £1,000 from an initial investment of £10k.

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc. 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.

More on Investing Articles

Investing Articles

FTSE 100 or S&P 500: where should I invest?

UK investors are often drawn to the high growth of US stocks. But there are pros and cons to be…

Read more »

Investing Articles

2 of the best US growth and dividend stocks to consider!

These heavyweight US stocks have been delivering tasty investor returns for decades. Here's why they could remain great picks for…

Read more »

Investing Articles

I reckon these 2 penny shares are hidden gems worth a closer look!

Some penny shares are well-known, whereas many others go under the radar, but that doesn’t necessarily mean they aren’t potentially…

Read more »

Investing Articles

Just released: our 3 best dividend-focused stocks to buy before August [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

2 FTSE 100 shares with blockbuster yields investors should consider buying

Our writer has noticed that these FTSE 100 shares offer mammoth dividend yields, and reckons investors should take a closer…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

Down 36% and yielding 7.8%, is this FTSE 250 share a bargain?

Christopher Ruane looks at a FTSE 250 share with a sizeable dividend yield and a recent record of dividend growth.…

Read more »

Investing Articles

Is Barclays one of the FTSE 100’s best bargain stocks?

Right now, Barclays' shares are cheaper than those of FTSE 100 rival stocks Lloyds and NatWest. So should I buy…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Is a takeover offer about to boost the Rentokil stock price, and should I buy?

The Rentokil share price is up 10% on takeover rumours. Is it a stock to buy or one to be…

Read more »