Investing in an ISA is arguably one of the easiest ways to start earning a second income.
Apart from all the tax advantages, owning stocks is a far more hands-off method to building wealth and earning extra income compared to starting a business or buying rental property. And while it can take a little while to get the ball rolling, the results can be extraordinary.
With that in mind, here’s how an investor can aim to unlock a £56,719 passive income starting with just £20,000.
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.
The magic of compounding
On average, the UK stock market generates a total annual return of around 8%. Thanks to exposure to the tech sector, the US stock market’s a bit more generous at around 10%. And investing £20,000 at this higher rate of return with simple S&P 500 index trackers can yield phenomenal results.
Fun fact, a £20,000 ISA growing at 10% a year will transform into just shy of £400,000 in 30 years. And this can be more than doubled to £800,000 by drip feeding an extra £200 each month.
But by using a stock picking strategy, these profits can be sent flying even higher. Why? Because with the right investments, a portfolio could yield significantly greater returns than just 10% a year.
Even if an investor only manages to eke out an extra 2% gain, that’s enough to transform that same £800,000 portfolio into over £1.4m. And when following the 4% withdrawal rule, that’s enough to generate a £56,719 second income.
Aiming for 12%+ returns
Let’s take a look at one of the biggest success stories of the London Stock Exchange – Ashtead Group (LSE:AHT).
Investing in an equipment rental enterprise isn’t exactly the most thrilling idea. But often it’s the boring businesses that yield the most explosive results.
In the past, construction companies often owned their own equipment. But this involved considerable upfront costs as well as ongoing maintenance. Ashtead sought to solve this sector-wide headache with its rental business model. And this simple idea transformed the enterprise into a cash-generative industry giant.
After dominating the UK market, Ashtead expanded abroad to the US. The result? Over the last 30 years, Ashtead’s grown from a tiny British enterprise into a £20bn global empire. And those who reinvested dividends paid along the way have unlocked a staggering 11,800% return.
That’s the equivalent of 17.3% a year – enough to turn £20,000 + £200 a month into £5.85m!
Still worth considering?
Due to its size, Ashtead isn’t likely to generate these levels of returns again. But it nonetheless shows the power of investing early in a business that’s solving a migraine-level problem with the talent to execute.
Having said that, there’s still a lot to like.
The company remains exposed to the cyclical whims of the construction sector. However, management’s been diversifying into new industries as well as countries like Canada to offset this risk. And with North America as a whole investing aggressively into renewing national infrastructure, there’s a strong tailwind for Ashtead to capitalise on.
That’s why I think this business is still worth a closer look for investors seeking to establish a chunky second income in the long run. But there are also other younger enterprises that I’ve got my eye on, which could prove even more lucrative.
