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Earning a passive income with a Stocks and Shares ISA is a no-brainer for many people. UK shares often pay large and reliable dividends that can boost your spending power or fuel further ISA growth.
But how can investors maximise their chances of a large second income? Here’s how someone could target a passive income above £43,939 in five steps.
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.
1. Start stashing cash
You can’t begin investing without having cash in an ISA, of course. The more someone has in their account, the more financial firepower they have to build wealth.
But do you have to put large lump sums aside to start building wealth? Not at all. Think about investing small amounts regularly — over time, this can create an enormous nest egg generating a steady second income.
Just £300 a day can get the job done, as I’ll show below.
2. Keep charges low
ISAs are popular for their famous tax benefits. They protect investors from capital gains and dividend tax, while withdrawals are also protected from income tax.
Yet not all accounts are the same in terms of charges. And those who fail to pay attention can end up significantly overpaying for their service, giving them less money to compound over time.
According to IG, some Stocks and Shares ISA investors overpay by a staggering £922 a year. Keep an eye on things like trade commissions and account management fees when choosing an account.
3. Build a diversified ISA
With money set aside and an ISA set up, it’s time to start filling it with stocks, trusts, and funds. Creating a diversified portfolio is important to spread risk and capture a range of different investing opportunities. I personally like to have exposure to hundreds of companies.
But how is this possible, without spending huge amounts in transaction costs and time? Investment trusts like Allianz Technology Trust (LSE:ATT) are a ‘cheat code’ for both new and experienced investors alike to diversify across sectors and/or regions.
This one spreads investors’ capital across 49 different companies, spanning semiconductor makers, software developers, and consumer electronics manufacturers. So if one company or sub-segment underperforms, it doesn’t drag down the entire portfolio.
Over the last five years, it’s delivered an average annual return of 12.3%. That’s above the 9% that stock investing has tended to deliver over time. Performance could disappoint if economic conditions worsen and tech spending drops. But I’m confident of more impressive returns as the digital revolution rolls on.
4. Stay patient
Thinking long term and staying disciplined is critical for building wealth over time. Not reacting to every market swing gives your investments chance to flourish, and to let yout ISA recover from volatile periods.
If stock markets keep delivering an average yearly return of 9%, a £500 investment a month would turn into £549,223 after 30 years.
Past returns aren’t always a reliable guide. However, I’m confident that 9% average return can continue.
5. Generate passive income!
At this point, it’s could be possible to earn a strong and sustained second income.
I like the idea of buying dividend shares in a Stocks and Shares ISA. It’s a strategy that delivers a steady stream of dividends while allowing room for additional portfolio growth.
With an average 8% dividend yield, an ISA of £549,223 would deliver a £43,939 passive income.
