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Turning a £20k ISA into a £13,900 a year second income? It is possible!

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With a new tax year upon us, a whole new ISA allowance kicks in once again.

I think investing in a Stocks and Shares ISA in the right way can help turn it into a powerful passive income machine over the long term.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any tax advice. Readers are responsible for doing their own due diligence and seeking professional advice before making any investment decisions.

If I wanted to target an income of £13,900 a year, for example, here are the investment rules I would use to put my £20k ISA allowance to work.

Taking a long-term view

To get an income of £20,000 to £13,900 next year I would need a dividend yield of around 70%.

I don’t see it as even remotely realistic. what Is Realistic though, is to increase the dividend yield I have achieved by compounding the dividends on the initial £20k investment over time.

For example, if I got an average 7.5% dividend on my ISA and compounded for 31 years, I’d be earning over £13,900 a year in other income.

More than three decades is a long time to wait. Again, I think the potential financial rewards justify it.

Stick to potentially strong income generators

Past performance is no guide to future performance. Profits come and profits go.

So in building a portfolio for my ISA, I will look to the future and try to find companies that I think have the potential to provide long-term income streams.

To clarify what I did will do Find, consider as an example Phoenix (LSE: PHNX). gave FTSE 100 The company operates in a market that is likely to experience large, flexible demand over the long term by providing financial services such as pensions.

It enjoys competitive advantages including strong brands, a broad customer base and a deep understanding of specialist markets. It also has a proven ability to generate substantial cash flow.

Recently, the company said it plans to continue growing annual profits. The yield is already a juicy 10.3%. Note that I would not buy a company just because of its production. It first needs to strike me as a great business for sale at an attractive price. Only then do I consider its production.

Expanding my choices

Phoenix faces threats. For example, it has incurred more than normal non-operating expenses. It expects these to decrease as it completes its investment program to grow the business. However, if this does not happen, such costs will continue to eat into profits.

I’d like to reduce the risk that a bad choice sinks my long-term income plan. So I will diversify my ISA into a range of different shares. £20K is enough for that.

getting started

In theory I think it is now possible to earn £13,900 a year in the future from an investment of £20K.

In practice, though, it does work. So I will now invest time in finding the best stocks and shares ISA that I can use as the basis of my long-term second income plan.

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