Building a second income is one of the biggest motivations for investing, especially for those who want the freedom to retire when they’ve had enough of working. With £20,000 of savings and a 25-year time horizon, a 40-year-old may be surprised to see just how much their money could grow in FTSE 100 shares.
Compounding does the heavy lifting
Now let’s say they invest their full £20,000 Stocks and Shares ISA today, then never add another penny. Let’s also assume their portfolio generates an average annual compound total return of 7%, roughly in line with the long-term FTSE 100 average.
By age 65, their £20,000 would have grown to £108,549. That’s more than four times the original investment, just by sitting tight and being patient.
Once-and-done investing like this has its limitations. The real rewards come from putting money into the market month after month, year after year. If that same investor chipped in £5,000 a year and enjoyed the long-term return, they’d retire with a portfolio worth around £446,931. Now that’s more like it.
Sainsbury’s: dividends and growth
A steady ISA portfolio doesn’t have to be built on high-flying growth stocks. Long-term compounders with dividends can do the job too. One business investors might consider buying is J Sainsbury (LSE: SBRY).
Often overshadowed by its bigger rival Tesco, Sainsbury’s has quietly delivered a solid performance of its own. The share price is up 8% over the last year and 45% over five years. That’s decent rather than dazzling, but doesn’t include dividends.
Right now, the shares offer a trailing yield of 3.35%, broadly in line with the FTSE 100 average. Add that to capital growth, and the returns start to look more respectable.
On 17 April, Sainsbury’s posted its full-year 2024 results showing group sales excluding fuel rose 4.2% to £26.6bn. Operating profit increased 7.2% to £1.04bn.
The group also generated £531m in free cash flow, completing a £200m share buyback and hiked its dividend by 4% to 13.6p. Management plans to return another £250m to shareholders courtesy of a special dividend, funded by the sale of its banking arm.
I don’t expect the Sainsbury’s share price to go gangbusters. Competition’s fierce, with Aldi, Lidl and Asda breathing down its neck, while its 15% share of the grocery market still trails far behind Tesco’s 28%. There’s a constant supermarket price war going on, resurgent inflation could squeeze margins, and shoppers aren’t exactly feeling flush.
But over 20-25 years, I reckon Sainsbury’s shares could deliver a healthy mix of capital growth and compounding dividend income.
Passive potential
A £446,931 ISA could generate £17,877 a year using the 4% ‘safe withdrawal’ rule. That’s a decent stream of passive income.
That kind of sum could help fund a comfortable retirement, especially when combined with the State Pension or other savings. Of course, stock market returns are never guaranteed. Some years will disappoint, others will exceed expectations.
But the market tends to reward patience. And those rewards are felt most keenly in later life, when a well-built ISA portfolio starts to deliver that all-important second income.
