How do I plan to make a second income of £86k a year in the stock market?

I hope to reduce my work commitments in the future and am confident in my portfolio to make this a reality. As they grow, so does their ability to generate a sizeable second income.

In fact, some simple calculations tell me that more than £86k a year could one day be generated in tax-free dividends.

Please note that tax treatment depends on each customer’s individual circumstances and may change in the future. The content in this article is for informational purposes only. It is not intended to be, and does not constitute, any tax advice. Readers are responsible for conducting their own due diligence and seeking professional advice before making any investment decisions.

be realistic

At the heart of my plan is trying to maximize annual spending Stocks and shares ISA contribution limit. This is currently £20,000, meaning around £1,666 per month.

However, reaching this figure every month can be extremely difficult. Figures show that only a small minority of ISA account holders regularly deposit the full twenty thousand a year.

In my case Christmas is coming up and my daughter is old enough to know the difference between supermarket clothes and branded clothes that cost 10 times more! Translation: A pricier December is upon us!

Moreover, bills and almost everything else are much higher than before. So my conservative forward calculations here assume I only invest £12k on average, or £1k a month.

Diversification

A few years ago I only had growth stocks in my portfolio. However, very sharp downturns in the market (such as in late 2018) have caused almost every stock in my ISA to fall heavily.

These sickening declines led me to rethink this approach and rebalance my portfolio. Since then, I have held some dividend stocks that continued to generate income even during that period. bear markets.

There’s no guarantee of payment, of course, so I have several dividend payers to offset the risk of interruptions and cancellations.

The beauty of this is that I can choose to reinvest dividends to accelerate the wealth creation process compound process. This means I’m sacrificing dividends now in order to grow my portfolio for potentially much larger income in the future.

High return stocks

A dividend stock I own that I think is undervalued: Aviva (LSE: AV.). The company provides insurance, wealth and retirement services in the UK, Ireland and Canada.

Aviva has performed well, with general insurance premiums rising 15% to £9.1bn in the first nine months of 2024. Net wealth flows increased by an impressive 21% to £7.7bn.

It currently has 19.6 million customers, but it doesn’t stop there as it aims to have 21 million customers by 2026. And it predicts the number of UK customers with two or more Aviva policies could rise from 5 million today to 5.7 million by then.

Naturally, this target depends on the UK economy playing ball. If there is a recession, it may be harder to encourage cash-strapped customers to sign up for more than one policy.

That being the case, Aviva shares are trading cheaply and offer a mouth-watering forward dividend yield of 7.8%. This is above the FTSE 100 average of 3.6%.

Being realistic: part 2

My diversified portfolio has performed very strongly overall this year. However, it won’t always do well, so I’m assuming here that it produces an average of 10.5% (slightly above market averages) going forward.

In this case, with dividends reinvested, my ISA would grow to £1,442,179 after 25 years. Making just £1,000 a month starting from scratch isn’t bad at all!

So what second income can this give me until then? A portfolio yielding 6% yields £86,530 per year.