A Stocks and Shares ISA is a brilliant way to build a second income. But it’s not an overnight job. It takes time and patience. Sticking at it, making regular monthly contributions, and throwing in the odd lump sum as the deadline looms can build serious wealth over time.
That wealth can generate far more passive income than many people realise, often without touching the underlying capital, which can be left to grow.
In my view, one of the best ways to do that is by investing in a spread of FTSE 100 and FTSE 250 shares, particularly those that pay regular dividends.
FTSE 100 income stocks
Dividends are cash payouts companies make to shareholders as a reward for holding their stock. It means even in years when the share price goes nowhere, or even falls, investors still receive something in return. They’re typically paid twice a year, sometimes quarterly. While dividneds may seem small at first, they build steadily over time, especially if investors automatically reinvest every payment to buy more shares and compound their returns.
That reinvestment can even turn market dips to an advantage, as dividends buy more shares when prices are lower.
But generating a second income of £25,000 a year still requires serious capital. If a portfolio yields 4%, an investor would need a pot worth £625,000 to produce that level of income.
It’s possible to target a higher yield. One of my favourite FTSE 100 income stocks, insurer Phoenix Group Holdings (LSE: PHNX), which currently boasts an ultra-high trailing yield of 7.25%. At that rate, an investor would only need roughly £345,000 to generate £25,000 a year.
The Phoenix share price has delivered growth lately too, climbing 50% over the last year. But I’d never suggest putting an entire ISA into one stock. That’s simply too risky.
Phoenix shares are flying
If profits or cash flow come under pressure, dividends can be cut or even axed. Individual stocks can also be volatile. Ideally, investors should build a diversified portfolio of at least 10 shares to spread risk across different sectors and business models.
Phoenix wouldn’t make a bad starting point though. I hold it myself and think it’s worth considering with a long-term view. It’s increased its shareholder payouts for nine consecutive years, lifting the dividend per share from 41.75p in 2016 to 54p in 2024. That’s average growth of around 3% a year, although forecasts suggest the pace may slow to roughly 2% annually in the next few years. Given the high starting yield, that still looks attractive.
As with any stock, there are risks. Phoenix operates in a competitive market and must continually source new business. A stock market downturn would also hit the value of the assets backing its insurance liabilities.
The yield is eye-catching, but higher yields often signal higher risk. For me, Phoenix would sit best as part of a broader portfolio of quality FTSE 100 income shares inside a Stocks and Shares ISA. There are plenty of other strong dividend payers out there too, so it pays to do some homework. The 5 April ISA deadline fast approaching, so there’s no time to lose. That second income stream won’t build itself.
