Generating a second income from FTSE 100 shares is a great way to build financial security in retirement. Even better, using a Stocks and Shares ISA ensures that both the passive income and any capital growth from rising share values are tax-free for life.
Many don’t realise just how effective this strategy can be, so let’s crunch the numbers.
FTSE 100 dividends roll up over time
Aiming for a monthly second income of £499 means targeting an annual income of £5,988. The amount of capital required depends on the portfolio’s average dividend yield.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
While the FTSE 100 has an average yield of around 3.5%, I believe that a well-diversified portfolio of dividend-paying stocks could achieve a higher level of income than that. If targeting a 6% yield, an investor would need £99,800 to generate the desired target income.
That’s a big sum, but it can be built over time. An investor could hit the goal in 25 years by investing £125 a month in a spread of stocks with an average total return of 7% a year, roughly in line with the long-term FTSE 100 average. They’d do it in just 17 years by doubling their investment to £250 a month.
Land Securities Group looks decent value
One potential stock to consider for a dividend-focused ISA is Land Securities Group (LSE: LAND). As one of the UK’s largest commercial property developers and investors, it manages a diverse portfolio spanning office spaces, retail parks, and, more recently, residential properties.
The real estate investment trust (REIT) has faced headwinds from rising interest rates and the home working trend, which has hit demand for office space. Additionally, the growth of online shopping has impacted footfall at retail parks. These factors have weighed on the stock price, which is down 20% over five years and 10% in the last 12 months.
However, this downturn has pushed the stock to an attractive valuation, with a price-to-earnings ratio of just over 11. More importantly for income investors, the yield has now climbed to a hefty 7.07%.
This stock has a juicy 7% yield
While I don’t expect a major share price rebound to happen quickly given today’s uncertainties, the combination of a low entry price and high yield could make it appealing for long-term investors focused on income. The short term could be bumpy though.
When interest rates eventually ease and economic conditions improve, Land Securities could see stronger demand for its assets, potentially boosting its share price and securing those dividends. As with any stock, there are no guarantees.
Generating a £499 monthly second income through a Stocks and Shares ISA is achievable with a disciplined investment strategy. By focusing on dividend-paying stocks and reinvesting returns, investors can harness the power of compounding.
However, it’s crucial to diversify. While stocks like Land Securities offer high yields, they come with risks. A balanced portfolio with at least a dozen different stocks, and possibly a few more, can help manage volatility and reduce reliance on any single sector.
Over time, this approach should build a reliable second income stream. Just be prepared for some ups and downs along the way.
