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

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.

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.

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.

The post £20,000 in savings? Here’s how it could pave the way to a £50,000 second income appeared first on The Motley Fool UK.

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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.