£20,000 in savings? Here’s how it could pave the way to a £50,000 second income

Our writer shows how it is perfectly possible to build a very attractive second income investing regularly in the stock market.

| 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.

Smiling family of four enjoying breakfast at sunrise while camping

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.

The third Monday of January is often called ‘Blue Monday’. Apparently this is when we’re all cold, skint, and back at the metaphorical millstone. For many, it would be nice to have a sizeable second income to call upon.

Here, I’ll explore how £20k in savings could be put to work in the stock market in order to lay the foundations for such a sum.

Beginning the journey

At last count, there were nearly 4m Stocks and Shares ISA accounts subscribed to in the UK.

Should you invest £1,000 in Kainos 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 Kainos made the list?

See the 6 stocks

I’m surprised it’s not more, to be honest. That’s because these fantastic vehicles offer the chance to invest up to £20k a year in shares, bonds, or funds without paying tax on returns, including income.

Consequently, it’s possible to build wealth much faster in a Stocks and Shares ISA. And this makes them a no-brainer for newbie investors, in my opinion.

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.

But what return is realistic?

According to the latest data, the average annual return for a Stocks and Shares ISA is just under 10%.

However, that doesn’t mean all investors enjoy that return every year. The stock market doesn’t go up in a straight line and individual shares do fall, while dividends aren’t guranteed.

For example, the S&P 500 rose 23.3% during 2024. This was largely driven by shares related to artificial intelligence (AI), notably Palantir Technologies (up 360%) and Nvidia (+177%).

In total, 66% of stocks delivered positive gains for the year, which means 34% didn’t. Clearly then, some people lose money in the stock market, while others generate much higher returns than the average.

But I think 10% is a realistic long-term target for most investors, as the ISA return figures demonstrate.

What shares to consider buying?

An investor can buy dividend shares, growth stocks, or a combination of different types of stocks. In the latter group, I believe Coca-Cola HBC (LSE: CCH) is worth considering. I own shares myself.

Created with Highcharts 11.4.3Coca-Cola Hbc Ag PriceZoom1M3M6MYTD1Y5Y10YALL12 Jan 202012 Jan 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '2520212021202220222023202320242024www.fool.co.uk

The FTSE 100 company is a partner of The Coca-Cola Company. It manages bottling, distribution, and sales in 28 markets across Europe and Africa, while the US soda giant oversees branding and formulas.

There are a few things I like here. First, its portfolio of brands is unsurprisingly rock-solid, including Schweppes, Fanta, Sprite, Costa Coffee beverages, and of course Coke. These top-tier brands enable pricing power.

Second, despite high inflation and weak consumer spend, Coca-Cola HBC is still growing. This year, City analysts expect it to increase its earnings by around 10.7%. And this is expected to feed through to a 10% rise in the dividend. The forward yield is 3.35%.

Finally, the valuation looks reasonable. Right now, the forward price-to-earnings (P/E) ratio is 13.5, broadly in line with the wider FTSE 100.

One risk worth mentioning is ongoing boycotts of well-known US brands in Muslim-majority countries due to America’s support of Israel in Gaza. For the firm, these include Egypt and Bosnia.

Getting to £50k

Twenty grand alone isn’t enough to generate a sizeable second income, but it can lay the groundwork.

If an investor adds a further £500 a month, and reinvests dividends instead of spending them, then their ISA would grow to £833,821 after 25 years.

At this point, a portfolio yielding 6% could be throwing off £50,029 a year in dividends.

Should you buy Kainos shares today?

Before you decide, please take a moment to review this first.

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Claim your free copy now

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.

Ben McPoland has positions in Coca-Cola Hbc Ag. The Motley Fool UK 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, 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

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »