Earning dividends from the shares of proven blue-chip businesses is a common way to try and earn some extra money. Done the right way, it can potentially provide a substantial second income over time.
How big an ISA would someone need to target a four-figure monthly income this way?
The income economics here are quite simple
The amount needed will depend on the average dividend yield of the ISA. Yield is basically what an investment earns annually in dividends, expressed as a percentage of the price paid for it.
As investors pay different prices even for the same share over the course of time, different investors often do not earn the same yield even from the same share.
£1k a month adds up to £12k per year. To keep things simple for illustration purposes, imagine the yield is 10%. That would mean the ISA needs to be worth £120k to generate the target second income.
In practice, blue-chip shares rarely offer such a yield. At the moment, the flagship FTSE 100 index of leading shares is yielding 3%.
That is only an average, though. I think a higher yield is realistic in today’s market even when sticking to a diversified selection of quality businesses.
I reckon 6% is achievable; that would mean the ISA needs £200k in it to hit the second income target.
Building the ISA up over time
That is 10 times most people’s annual ISA contribution allowance.
Does it require a decade of saving then? Not necessarily, even for someone starting from scratch.
By investing £20k per year and compounding (reinvesting) the dividends, the ISA should be worth £200k after nine years.
Constructing an ISA portfolio the right way
I already mentioned diversification: that is a simple but important form of risk management that basically means not putting all your eggs in one basket.
An investor can make other smart moves when it comes to managing their Stocks and Shares ISA, from comparing providers — to choose one that seems best for their personal needs — to carefully assessing a company’s likely future dividends, not just looking at its track record. Dividends are never guaranteed to last.
Here’s an income share to consider
One dividend share I think is worth investors considering right now is FTSE 250 firm MONY (LSE: MONY), the owner of businesses including Money Supermarket.
The fear that AI could eat into the price comparison website’s customer usage explains why its share price has tumbled 23% over the past year.
I think that AI risk is real. But I also think MONY could well be able to navigate around it, emphasising its deep experience, focus on specific financial products, and ability to offer complex products in a way that for now at least AI tools would struggle to do.
The business is proven and highly cash generative. That helps support a generous dividend. Indeed, the dividend yield currently stands at 8.1%.
The next few years promise to be challenging ones for the firm as AI starts to play a more prominent role in financial service cost comparison.
But I reckon MONY could play to its strengths, keep throwing off spare cash, and hopefully pumping out chunky dividends.
