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Investors with £20,000 in a Stocks and Shares ISA have many ways to build a second income. Here’s one imagined ISA portfolio to consider that could deliver a large and lasting passive income.
7 high-yield heroes
| Dividend share | Sector | Dividend yield |
|---|---|---|
| HSBC (LSE:HSBA) | Banking | 6.5% |
| Legal & General | Financial services | 8.8% |
| Vodafone | Telecommunications | 6.2% |
| Bluefield Solar Income Fund | Renewable energy | 9.3% |
| M&G | Financial services | 10.5% |
| Pennon Group | Utilities | 5.9% |
| Taylor Wimpey | Construction | 8.5% |
The portfolio is loaded with high-yield shares that — if broker forecasts prove correct — could provide an above-average second income.
And with diversification across both defensive and cyclical sectors, it can provide stability during economic downturns and the potential for dividend growth over the long term.
Water supplier Pennon Group and Bluefield Solar Income Fund are vulnerable to higher interest rates that depress asset values and increase borrowing costs. However, the essential nature of their operations means earnings remain broadly stable over time, making them reliable dividend payers.
Likewise, housebuilders such as Taylor Wimpey can suffer when elevated interest rates put pressure on homebuyer affordability. Yet thanks to their strong cash generation, they can still be a reliable source of dividends in rougher patches.
Robust financial foundations also make Legal & General and M&G solid dividend plays (latest financials showed their Solvency II ratios at 203% and 223% respectively). This gives them strength even when pressure on consumer spending dents revenues.
Vodafone could be a riskier pick due to its high debt levels. Indeed, it recently cut shareholder payouts in a bid to rebuild the balance sheet. But I’m confident dividends will rise strongly over the long term, driven by the growing digital economy and the firm’s emerging market exposure.
Brilliant bank
HSBC is a dividend share I’m considering adding to my own portfolio. I feel its focus on fast-growing Asian economies could deliver substantial earnings and dividend growth over the long term.
The FTSE 100 bank isn’t having everything its own way at the moment though. Conditions are tough in China, and particularly in the real estate sector. And they could get more challenging if global trade tariffs keep rising.
But the outlook for its Asian markets remains bright further out as as population numbers and disposable incomes boom. Statista analysts think banks’ net interest income across ASEAN nations will rise around 4% each year through to 2029.
In the meantime, HSBC’s strong balance sheet should (in my opinion) allow it to keep paying large dividends even if profits stutter. Latest financials showed its CET1 capital ratio at a chunky 14.9%.
A £16k second income
If forecasts are accurate, a £20k lump sum spread across these shares in an ISA would generate a £1,600 annual passive income. That’s based on an average 8% dividend yield.
If the dividends remained unchanged and were reinvested, they would — after 30 years — create a portfolio worth £201,254. Thanks to the miracle of compounding, that would then provide a second income of just over £16k a year. That said, making this kind of assumption for seven different stocks is tricky. Some may boom but others may struggle in the decades ahead.
Yet their combined dividend income could feasibly be greater than I’ve suggested as I think these shares could deliver significant capital gains as well as a rising flow of dividends.
