£20,000 in a new ISA? Here’s how I’d target a lifelong second income

We’d all love a second income. Just something to make life that bit easier, or to help us navigate challenging times. Dr James Fox explains his strategy.

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There are plenty of ways to earn a second income. We can take up a second job, we can invest in buy-to-let properties, or we can invest in stocks and shares. Unsurprisingly, I favour the latter.

However, getting to the point where I’m earning a big tax-free second income from my portfolio is going to take time. That’s because even if I had £20,000 in a Stocks & Shares ISA, the most I could realistically earn in the first year is £1,400.

However, if I were willing to grow my investment, I could earn a lot more in the future. The thing is, it requires sensible and data-led investment decisions.

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.

Taking a long-term approach

The long-term approach is certainly my way of doing things. I don’t need the second income today, but I appreciate I may do in the future.

So every year I reinvest my returns and go again. This allows me to benefit from something called compound returns. Compounding happens when I earn interest on my interest, and it’s the real magic of investing.

But I need to be picking the right stocks. Because if I invest poorly, I could lose money. So I need a diverse portfolio of stocks, and one of my favourite picks right now is GigaCloud Technology (NASDAQ:GCT).

The name’s a little misleading. Essentially, the company connects furniture manufacturers in China with resellers and customers in North America and Europe.

Gone are the old models of unsold furniture — which takes up a lot of space — sitting in showrooms or storage facilities in the country of sale.

GigaCloud takes the furniture from the factory and delivers it to the customer overseas, while the sales are predominantly handled by other companies.

In fact, if I were to open an Amazon store selling furniture, I could use GIgaCloud to do all the logistics without me ever seeing the product.

Some investors were sceptical about the company, but some recent investigative work has shed light on the company’s operations. And the outcome was positive.

GigaCloud has noted that disruption in marine shipping could cause some challenges, especially to Asia to Europe routes, and if conflicts escalate.

And finally, from a valuation perspective, it’s trading at 12.1 times forward earnings. And that looks great given the growth trajectory.

Based on earnings expectations, GigaCloud’s trading at 9.7 times earnings for 2025, and 7.8 times for 2026.

Creating lifelong income

GigaCloud’s one of those companies I believe can take my portfolio forward and help me achieve my goals. If I could grow my portfolio at 10% annually, and contribute an extra £200 a month, after 15 years I’d have £171,972.

Assuming an annualised dividend yield of around 7% — which is possible today, but might be harder in 15 years — I’d be taking home a second income worth £12,038. And that could grow every year as companies tend to increase their dividend payments over time.

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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Fox has positions in GigaCloud Technology Inc. The Motley Fool UK has recommended Amazon. 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.

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