3 steps to try and turn a £9,000 ISA into a £5,654 second income

By investing £9,000 in carefully chosen blue-chip income shares, our writer believes he could generate a long-term second income well into four figures.

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One way I seek to benefit from having a Stocks and Shares ISA is by earning passive income. Thanks to dividends from shares, I can build a second income even without having to work for it.

Doing that does not necessarily require tying up a lot of funds. If I had a spare £9,000 now I would happily put it into an ISA and use it to build a second income. Here is how.

1. Getting ready to invest

My first move would be to find the Stocks and Shares ISA that suited my own needs best and put the money into it. There is no “one size fits all” model for this, as everyone’s financial circumstances and investing objectives are different.

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Before I started putting the money to work in the stock market, I would take time to learn about how the market works and set an investment strategy. Just because a share has paid large dividends in the past does not guarantee that it will pay them in future (or indeed, any at all).

So I would spend time learning about the source of long-term dividend streams, from having a strong position in a resilient market to companies being able to use spare cash for dividends instead of other things like debt repayment.

2. Finding shares to buy

That £9K would be comfortably enough to let me diversify across multiple shares. It would help reduce the impact on my ISA if one of the companies performed worse than I hoped, which is always a risk.

Although my plan here is about building a second income, I would not just start by looking for the highest-yielding shares available. After all, dividends are never guaranteed to last. Sure, Vodafone still has a double-digit percentage yield based on historical data. But the telecoms firm announced months ago it plans to halve its payout per share.

Instead, I start by looking for what I see as a defensible business in a sector that benefits from large customer demand I think is likely to last. I consider things like its balance sheet and likely future spending requirements when judging what sort of payouts I think it could likely afford in future.

Created with Highcharts 11.4.3Legal & General Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

I own shares in Legal & General (LSE: LGEN), for example.

Financial services is a massive market and I see no reason to expect that to change any time soon. With a strong brand, large customer base and long experience in its home market, I think Legal & General is set to keep performing well. It has a proven business model that has seen it make profits year after year in recent times.

It is also a significant cash generator, supporting a dividend that already yields 9.3% and looks set to grow again this year. In practice, a sudden financial downturn is a risk if it sees policyholders pulling out funds, forcing Legal & General to marshal its resources carefully.

3. Using dividends to buy more shares

Even at a lower average yield — say 7% (still well above the FTSE 100 average) — £9,000 would earn me a second income of only £630 a year.

But if I compound at 7% annually for 20 years, my £9K ISA today could be generating second income of £5,654 annually!

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p 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 10%, 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

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 Legal & General Group Plc. 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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