For someone with a long-term timeframe and wondering how to build a second income, using their Stocks and Shares strategically could be one option to consider.
Such an approach need not be complicated, or even time-consuming.
It does require patience and some capital, but even that can be paced, so it is possible to begin from a standing start.
Building towards sizeable passive income streams
For example, say someone wants to target £950 per month of income.
That would amount to £11,400 per year. That income could come in the form of dividends.
Not all shares pay dividends, but many do. Currently the FTSE 100 yields around 2.9%. That means that, for every £100 invested, an investor ought to earn around £2.90 per year in dividends.
But while the average is 2.9%, it is possible to target a higher yield while sticking to blue-chip shares. In fact, in the current market, I think a 6% dividend yield is a realistic goal.
Say someone puts £20k per year into their Stocks and Shares ISA and compounds it at 6% annually. After eight years, the ISA should be large enough to generate the monthly target of £950 in dividend income, at a yield of 6%.
Focusing on business quality
One of the things that can eat into returns is fees and commissions. It therefore makes sense to compare options when choosing a Stocks and Shares ISA.
But a key determinant of how well the ISA performs is, of course, what shares the investor chooses in the first place.
No matter how good a company is, it can still be a bad investment depending on how much someone pays for it. Not only that, but dividends are never guaranteed to last.
One simple risk management approach is to spread the ISA over different stocks and shares.
Another, complementary, key element is of course trying to choose the right shares in the first place. That can be difficult, but I think it is crucial.
What can make the process easier is sticking to industries and companies you understand and feel able to assess.
One share to consider
For example, the broadcaster ITV (LSE: ITV) is a company I think I can get a handle on.
It is basically two related businesses in one company. For many of us, the better known one is broadcasting, as ITV has been a national presence on screen for decades.
Such experience has given it a good foundation for its second business, which is renting out studios and providing production assistance to other media companies.
That has helped turn a possible risk – growing competition in an increasingly fragmented media market – into an opportunity.
Another risk has been the rise of digital media, taking eyeballs and advertising pounds away from ITV.
That remains an ongoing risk, but ITV has boosted its own digital output significantly in recent years to try and combat it.
With the FTSE 250 firm’s share price in pennies, ITV yields 6.5%. I see it as a share investors should consider.
