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Building a second income from the stock market is one of the smartest ways I know to ensure a comfortable retirement. A FTSE 100 portfolio wrapped inside a Stocks and Shares ISA can help make that happen.
Unlike pensions, ISAs don’t give tax relief on contributions, but everything inside grows free of income tax and capital gains tax. Dividends can also be taken without HMRC taking a cut. That makes them one of the simplest ways to build passive income over time.
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.
How the FTSE 100 builds wealth
A monthly second income of £1,000 works out at £12,000 a year. Using the 4% ‘safe withdrawal’ rule, which suggests investors can take that without eroding their capital, an investor would need a pot of £300,000 to achieve it.
It sounds daunting, but the miracle of compound returns can make it more achievable than it first appears. If someone invested £250 a month in a diversified ISA portfolio and earned 7% a year on average, they’d build just over £303,000 after 30 years.
NatWest is rewarding shareholders
Rather than simply tracking the index, I think they should pick a selection of around 15 to 20 shares in the hope of outperforming. High-quality dividend payers are particularly attractive. One that stands out today is NatWest Group (LSE: NWG). The FTSE 100 bank’s stock has been on a tear, up 50% over the last year and an astonishing 395% over five years, with dividends on top.
Despite that, it still looks reasonable value with a price-to-earnings ratio of just 9.75. That’s well below the FTSE 100 average valuation of around 15. The NatWest share price also looks tempting based on its price-to-book value (currently 1), which is considered pretty fair value.
Dividends and share buybacks
Crucially, NatWest pays a bumper income. Forecasts suggest a yield of 5.79% in 2025, climbing to 6.47% in 2026. That’s comfortably more than a best-buy easy-access account, and investors may also enjoy capital growth if the share price rises, although there are no guarantees. A dip could erode capital.
Latest results, published on 25 July, showed an impressive 18% rise in first-half operating pre-tax profits to £3.6bn, beating the £3.46bn forecast by analysts. Better still, the board lifted its dividend by 58% to 9.5p a share. This highlights how top dividend stocks don’t just pay a passive income, but one that potentially rises over time too. The board further rewarded shareholders with a £750m share buyback.
Any investor buying NatWest today must understand the risks. September and October is a notoriously bumpy time for stock markets, and we can’t rule out a wider stock marker crash. Sticky inflation is keeping UK mortgage rates high, squeezing demand. Plus there are rumours the government could introduce a windfall tax on banks in the November Budget.
Patience and diversification
There are always risks. Especially when a stock has done as well as NatWest. Despite this, I think long-term income-focused investors could still consider buying it today with a long-term view. Reinvesting those tax-free dividends can supercharge the long-term compounding process, and make that second income target easier to hit.
