How to invest £1,000 in an ISA and aim for a second income of £171,523

Dividend stocks are a natural choice for investors seeking a second income. But this might involve missing out on some major opportunities.

| More on:

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.

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.

Compound interest can be a powerful force for investors seeking a second income. The results take time to develop, but they can be spectacular for those who are willing to be patient.

Compound returns

Turning a £1,000 monthly investment into a £171,523 second income isn’t easy. It involves compounding at 9.64% per year over 30 years.

I don’t how it’s possible to achieve that with cash. But 9.64% is the average annual return from a Stocks and Shares ISA over the last 10 years. 

Should you invest £1,000 in Games Workshop right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Games Workshop made the list?

See the 6 stocks

There’s no guarantee this will continue. But 6.89% per year – the average FTSE 100 return over the last 20 years –  is enough to turn a £1,000 monthly investment into a £74,430 second income after 30 years.

That’s still a terrific result. So the next question is how to go about trying to achieve it.

Dividends?

Dividend stocks are an attractive choice for income investors. But I think looking for the best returns means trying to buy the best shares available, regardless of dividends.

Rolls-Royce is a good example – with no dividend, the stock is up 212% in the last 12 months. That would go a long way towards a 9.64% overall return and no UK dividend stock has produced a similar result.

Created with Highcharts 11.4.3Rolls-Royce Plc PriceZoom1M3M6MYTD1Y5Y10YALL17 Jul 201917 Jul 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

Even when the time comes to stop growing the portfolio and use it for a second income, I think this is still the best plan. After 30 years, compounding £1,000 per month at 9.64% results in an investment worth £1.96m.

Created at TheCalculatorSite.com

If it then grows at the same rate in the next year, the increase is £171,523. And an investor could sell part of the portfolio to take this out as a second income while leaving £1.96m of market value intact.

Getting started

With that in mind, it’s worth thinking about which stocks could be good to buy now. Halma and Rightmove are both good candidates, I feel. But with £1,000, I’d look to buy nine shares in Games Workshop (LSE:GAW).

After seeing Burberry, Nike, and Dr Martens struggle with reduced consumer spending, it would be reckless to ignore this risk with Games Workshop. But there’s also a lot to like about the business for the long term.

The most impressive thing about Games Workshop is it’s both a growth stock and a dividend stock. The firm has increased its operating profits tenfold over the last decade while distributing most of its cash to investors.

Created with Highcharts 11.4.3Games Workshop Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL17 Jul 201917 Jul 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

As a result, shareholders have had a double benefit. Higher earnings have taken the share price from £5.95 to £103.35, while a regular and growing dividend has allowed investors to increase the number of shares they own.

Exceptional returns

The way to aim for a 9.64% annual return is by focusing on the best opportunities available. That may or may not involve stocks with high dividend yields.

If it does, the cash will flow out automatically when the company pays its dividends. If not, investors looking for a second income can sell part of their portfolio as it grows each year.

Like buying £1 for 31p

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.

Stephen Wright has positions in Games Workshop Group Plc. The Motley Fool UK has recommended Burberry Group Plc, Games Workshop Group Plc, Halma Plc, Nike, Rightmove Plc, and Rolls-Royce 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

Investing Articles

Just released: our 3 top small-cap stocks to consider buying in April [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

Here’s why Tesla stock just rocketed 22.7%! Is it time to buy?

This writer wonders whether the news that sent Tesla stock soaring yesterday is a true gamechanger for the electric vehicle…

Read more »

Investing Articles

2 quality UK stocks to consider buying as share prices rally

With UK stocks moving higher, it might look as though investors with cash on hand have missed their chance. But…

Read more »

Investing Articles

How much £10,000 invested in Lloyds shares is forecast to be worth in 12 months

Harvey Jones is looking past today's stock market volatility to see where Lloyds shares may stand in a year's time.…

Read more »

Investing Articles

How Warren Buffett stays ahead of the stock market

When share prices fall, everyone suddenly wants to be like Warren Buffett. But what’s the secret to the Berkshire Hathaway…

Read more »

Investing Articles

Cheap UK dividend shares to consider buying right now

We're only just past the first quarter of 2025, but it already looks like the year could be another good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

What the heck is going on with the Barclays share price now?

The Barclays share price surged 25% as the market open on 10 April. Once again, the volatility’s been driven by…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

What the devil’s going on with the HSBC share price?

The HSBC share price has actually been less volatile than some of its peers, despite its Chinese operations suggesting it’s…

Read more »