Building a passive income in a Stocks and Shares ISA takes time, discipline, and a touch of faith in the stock market, but the rewards can be substantial. I’ve been running the numbers to see what it takes to generate a second income of £2,000 a month.
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Growth and dividends
A £24,000 annual income certainly calls for a sizeable investment pot, especially for those hoping to avoid touching the capital. The standard rule of thumb is a 4% withdrawal. This suggests taking that amount your total savings each year should preserve your underlying capital.
Based on that, a portfolio worth £600,000 could fund my £24,000 target income. That’s a dizzying number, no doubt about it, but still achievable over time. For example, investing £400 a month would grow to around £587,260 over 30 years. Raise the contributions slightly and that six-figure target comes within reach.
This assumes an average annual total return of 8%, from a combination of share price growth and dividend income. It isn’t guaranteed, of course. Markets rise and fall, and real returns depend on future conditions. But history shows stocks tend to outperform cash over the long term, despite the volatility.
Barclays smashes the FTSE 100
One stock I think investors could consider buying today is FTSE 100 bank Barclays (LSE: BARC). It’s had a storming run of late, with the share price up 75% over the past 12 months. Yet even after that surge, the stock still looks relatively cheap to me, trading at just 10 times earnings. That suggests there may be more value to come.
The dividend looks modest, with a trailing yield of 2.31%, but that’s partly due to the rising share price and the bank’s preference for share buybacks, recently announcing another £1bn. Earnings remain strong, with a 28% jump in first-half profits to £5.2bn (reported on 29 July).
There are always risks. Investment banking revenue can be lumpy. Chancellor Rachel Reeves may also seek fresh tax revenues from the banking sector, which adds a layer of political uncertainty. And after such a strong rally, there’s always the danger of a short-term pullback, especially if US markets stall.
I still think Barclays is worth considering as a long-term buy-and-hold for investors willing to ride through the bumps.
Spread investment risk
A portfolio aiming for long-term income needs diversification, mixing growth stocks with dependable dividend payers. I hold a basket of around 20 shares, balancing different sectors and income profiles. That way, if one or two go off the boil (and they have!) the others should keep driving things forward.
Building a tax-free second income of £24,000 a year’s a big challenge. But with regular investing, realistic expectations and a sensible spread of shares, I believe it’s achievable. The earlier the journey begins, the easier it becomes. The prize at the end is a passive income for life, which I think’s worth it.
