I’d invest £250 a month in a Stocks and Shares ISA to target a £34k second income

Regularly investing in a diversified Stocks and Shares ISA could be the route to a comfortable retirement. Our writer considers his simple strategy.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Middle-aged black male working at home desk

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Investing in a Stocks and Shares ISA doesn’t need to be complicated. Keeping it simple can also help me achieve my financial goals.

But what does help is a clear target for what I want to achieve. For instance, I’d like an additional income to help provide a comfortable retirement.

To satisfy this aim, let’s consider what I’d need to do.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

A long-term Stocks and Shares ISA

First, I should be mindful of how long I’d need to invest for. By investing a relatively modest sum of £250 a month, reaching a five-figure annual income won’t happen overnight.

But if I diligently continue this process consistently for the next 30 years, I’d expect to build a pot worth almost £500,000. Thereafter, by investing in a diversified group of dividend shares, I calculate that I should be able to earn £34,543 in passive income.

A simple strategy

Over the long-term, the average stock market return has been around 10% a year. But bear in mind that investing is rarely a steady path.

Over the past three decades, the FTSE 100 gained by over 20% in four of those years. But in the financial crisis of 2008, it dropped by a whopping 30% in one year.

History shows that one way to benefit from these swings is by pound cost averaging. This is where a fixed amount is invested at regular intervals. That way, if the stock market falls, investors would pick up shares at lower prices.

It avoids trying to time the ups and downs of the market, thus making it a relatively simple strategy for my Stocks and Shares ISA.

Keeping the discipline to continue the systematic investments over many years should prove lucrative and relatively stress-free.

As the well-known investing phrase goes, “time in the market beats timing the market”.

What to invest in?

For a long-term Stocks and Shares ISA, I could invest my £250 a month in a FTSE 100 or S&P 500 index fund. These instruments aim to track the performance of the major stock indices.

Alternatively, I could build a diversified selection of high-quality businesses. To keep it simple, I’d focus on large and established companies that I think will continue to thrive over many years.

It can be tempting to buy the latest hot stock of the day. But I’d resist. Investors should stick to tried and tested methods for a low-stress, simple strategy.

But what makes a high-quality share? Popular investors Warren Buffett and Terry Smith both look for companies that have sustainable competitive advantages. This could be in the form of a strong brand, or long-standing customers.

In addition, I’d also look for a high profit margin and solid balance sheet.

Top of the stocks

Right now, I’d say companies like Diageo, Unilever, Alphabet and Microsoft meet these criteria. And if I had fresh funds to start this plan today, I’d certainly buy these for my ISA.

Looking ahead, once I’m ready to start withdrawing income, I’d switch my strategy to buy a selection of the best dividend shares.

Right now, I’d consider Phoenix Group, British American Tobacco and Legal & General. On average, they offer a 7% dividend yield. But as that could change in the future, I’d need to re-evaluate at the time.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Harshil Patel has positions in British American Tobacco P.l.c. and Microsoft. The Motley Fool UK has recommended Alphabet, British American Tobacco P.l.c., Diageo Plc, Microsoft, and Unilever Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Here’s a dirt-cheap FTSE 100 share to consider before it surges again!

This FTSE 100 share may have doubled in value in 2025. But as Royston Wild explains, it still looks like…

Read more »

Man thinking about artificial intelligence investing algorithms
Investing Articles

Can I buy Cathie Wood’s ARK Innovation ETF for my ISA or SIPP?

The ARK Innovation ETF is a US investment fund. Can the product be bought for an Individual Savings Account or…

Read more »

Little girl helping her Grandad plant tomatoes in a greenhouse in his garden.
Investing Articles

Lloyds shares: here’s the latest price and dividend forecasts

Harvey Jones is thrilled with the total return from his Lloyds shares. Now he examines whether they can keep serving…

Read more »

Investing Articles

Up 50% and 30% in a year! These 2 FTSE 100 dividend shares are behaving like growth stocks

When dividend shares deliver growth as well, investors are in luck. These two FTSE 100 shares are best known for…

Read more »

Middle aged businesswoman using laptop while working from home
Investing Articles

2 stocks every passive income seeker should know about

Dividend shares can be great sources of passive income. Stephen Wright likes the look of two that have fallen out…

Read more »

Mature black woman at home texting on her cell phone while sitting on the couch
Dividend Shares

I asked ChatGPT for the best FTSE 250 stocks for passive income, with these results!

Jon Smith asks his AI friend for advice regarding passive income options, but doesn't agree with all the results that…

Read more »

A handsome mature bald bearded black man in a sunglasses and a fashionable blue or teal costume with a tie is standing in front of a wall made of striped wooden timbers and fastening a suit button
Investing Articles

Want to make a million from penny shares? Here’s 1 way to try

Investors wanting to build up a potential millionaire portfolio with diversified penny shares might want to consider adding this one.

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

Want to turn a £20k ISA into a £1m portfolio? Here’s how

Dr James Fox explains the strategy many investors employ when trying to turn their ISA into a life-changing pot of…

Read more »