A Stocks and Shares ISA can be a great resource for earning a second income. But a lot of people right now might be missing out.
According to the latest official data, the average Cash ISA balance is £26,900. And I can’t help but think that this could do better elsewhere.
Cash returns
The best Cash ISA that I can find right now comes with a 4.51% interest rate. That’s enough to make a £26,900 account generate £1,213 a year.
That’s actually not bad, especially with the tax protection that comes with an ISA. But there is one big thing to pay attention to.
Inflation can weigh on returns. According to the latest data, real returns from Cash ISAs have been negative in six of the last seven years.
Given this, I think it’s worth seriously considering other opportunities. And the stock market has plenty of income-generating investments.
Stocks and Shares ISAs
A Stocks and Shares ISA comes with similar tax advantages to a Cash ISA. Returns – whether capital gains or dividends – are tax-free.
That means investors can keep 100% of their returns. And I think there are opportunities to earn more than 4.51% a year.
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.
Grainger (LSE:GRI) shares come with a 5.49% dividend yield. In the context of a £26,900 portfolio, this amounts to a £1,476 a year second income.
The difference between £1,213 from cash and £1,476 from stocks might not seem like a lot. But that’s just the beginning.
What about inflation?
Grainger is in the property business. Specifically, it owns residential properties that it leases to tenants up and down the UK.
As most of us know, UK rents have tended to rise over the last 10 years. More importantly, they also tend to stay well ahead of inflation.
Source: Trading Economics
Grainger isn’t entirely resistant to rising costs. But I think it’s in a better position than a Cash ISA when it comes to cash losing its value.
So the choice is between a 5.49% dividend yield with some inflation protection or a 4.51% interest rate. But what about the extra risks?
What are the risks?
I think the stock market is a great place to invest for a second income. But – much as I’d like it to think otherwise – there are always risks.
With Grainger, the biggest danger is something threatening those consistent rent increases. And that’s impossible to rule out.
There are some political noises about rent controls in the UK. While they aren’t from major parties – yet – they are gathering momentum.
That’s a risk for the firm. But I see it as a threat to monitor rather than one to worry about, at least for the time being.
Saving vs. investing
There are times when people need cash. Grainger shares aren’t a currency people can use to pay for emergency costs.
When it comes to earning a second income, though, things are different. Inflation has been a huge issue for cash savings.
This is something investors need to think about. And Grainger’s dividend yield and cost advantages make it a good candidate to consider.
Stephen Wright has no position in any of the shares mentioned. The Twelfth Magpie has no position in any of the shares mentioned. 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 and Hidden Winners. Here at The Twelfth Magpie, we believe that considering a diverse range of insights makes us better investors.
