How to try and turn a £20k ISA into a £5,000 yearly second income

UK investors can capitalise on the tax advantages of a Stocks and Shares ISA to earn a sizeable second income in 2024. Here’s how.

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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.

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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.

Dividends are a phenomenal way to unlock a second income. Instead of spending countless hours on a side hustle or going into debt with buy-to-let, investing is a rewarding and time-efficient alternative. And with inflation driving up the cost of living, having a second income stream in 2024 is now more critical than ever.

With that in mind, let’s explore how to transform a £20k ISA into a cash-generating machine.

Earning a £5,000 investment income

A Stocks and Shares ISA opens the door to tax-free returns for British investors. With both capital gains and dividend tax allowances being cut in recent years, capitalising on the advantages offered by an ISA’s a no-brainer. But even if an investor’s fortunate enough to maximise their £20,000 limit in 2024, it still leaves a giant question mark over where this money should be invested.

Should you invest £1,000 in Aston Martin right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aston Martin made the list?

See the 6 stocks

The London Stock Exchange is filled with hundreds of dividend-paying enterprises. So investors are spoilt for choice. But that also makes it harder to pinpoint exactly where this precious capital should be allocated.

Let’s start by simply setting a target of earning £5,000 a year from dividends. The FTSE 100‘s historically sat between 3% and 4%. And through some prudent stock picking, this yield could realistically be initially boosted to 6% without taking on excessive extra risk with stocks like ITV (LSE:ITV). At this rate of dividend income, a £20k ISA would only produce £1,200 a year.

Created with Highcharts 11.4.3ITV PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

That’s nothing to scoff at, but it’s a far cry from £5,000. So how do we fix this?

Enter compounding

Instead of enjoying dividends from day one, investors can opt to automatically reinvest them through Dividend Reinvestment Programmes (DRIPs). These often come paired with lower fees and, in some instances, discounted prices.

As a result, the compounding process is accelerated. And assuming a portfolio can muster the market average annual capital gain of 4%, it would take roughly 14 years to expand the ISA second income to £5,000. And if I were able to contribute a further £500 each month, this timeline could be drastically shortened to just six years.

Finding winning stocks

Considering ITV is in the film and TV streaming business, it sounds more like a growth stock rather than an income opportunity. And while it certainly seems to share the volatility of a growth enterprise, this has also led to a rise in its dividend yield in recent years.

The company’s revenue stream consists of monthly subscriptions as well as advertising income. Both are recurring in nature, paving the way for ample cash generation, which is how the firm has maintained shareholder payouts even after committing billions to the creation of new content.

While there have been a few hiccups following writer strikes in the US, the group’s been successfully delivering significant cost savings to offset the impact on profits. But there’s still the risk of wasted money if its investment into new content doesn’t translate into quality that’s popular with viewers.

ITV isn’t the only 6%-yielding opportunity worth researching right now. And there may be lower-risk alternatives for investors to consider. Regardless, keeping risk in check with tactics like diversification will always play a crucial role in building a sustainable second income from an investment portfolio.

Should you invest £1,000 in Aston Martin right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Aston Martin made the list?

See the 6 stocks

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.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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