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How nice would it be to have a solid second income passively rolling in one day?
While this remains a dream for many people, some have already made it a reality. And the great news for UK investors is that it can be achieved tax-free through a Stocks and Shares ISA.
If I had £20k sitting idle today, here’s how I’d invest it to target an eye-catching second income down the road.
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.
Taking action
To get the ball rolling, I’d stick this cash into a Stocks and Shares ISA rather than a Cash ISA. The reason is that while Cash ISA returns are guaranteed, the average return from the stock market easily beats cash over the long run.
A Stocks and Shares ISA gives me almost endless investing options. I could put my money behind shares like Facebook-owner Meta Platforms or Amazon.
Or UK dividend stocks such as Lloyds, Tesco and HSBC. These regularly dish out a portion of their profits to shareholders.
For diversification, I could buy exchange-traded funds or investment trusts. These would give me instant exposure to many stocks in one fell swoop.
A UK share I like
So, one route is to let a professional manager invest for me. I don’t mean visiting one in an office. I’m talking about investing in funds run by professionals who do the stock-picking.
If I were starting out, one FTSE 250 option I’d consider is Baillie Gifford US Growth Trust (LSE: USA).
As the name implies, this is a trust that invests in US-listed growth stocks. Some of these will be familiar, such as artificial intelligence leader Nvidia and streaming giant Netflix, but some are more obscure.
Yet that’s the point. I’m trusting the managers to pick a portfolio of (mainly) winners, to help drive returns. Some will be hidden gems, hopefully.
What I particularly like here is that the portfolio has a number of exceptional private companies. Indeed, the top holding today (with about a 7% weighting) is SpaceX, Elon Musk’s unlisted space exploration firm.
The company has pioneered reusable rockets, which has significantly reduced launch costs. This allows it to offer competitive pricing for satellite launches and other space missions.
The firm has just put its 5,999th Starlink satellite into orbit, and this was the 307th time SpaceX has landed its rocket booster.
Reports suggest revenue at Starlink, its direct-to-consumer satellite internet system, will jump to around $6.6bn this year, up from just $1.4bn in 2022.
Finally, Baillie Gifford US Growth is currently trading at a 10% discount to the net asset value of its underlying investments. In retrospect, this might prove to be a bargain.
The path to £15,025
Now, despite my enthusiasm, growth stocks can be very volatile. Using rocket metaphors, they have a tendency to either crash and burn or go to the moon. Underperformance is a risk.
However, assuming a portfolio of stocks like this collectively returned an average of 8.5% a year, my £20k would grow to £231,165 after 30 years. This is with any dividends reinvested.
At this point, if I switched entirely to dividend stocks yielding an average 6.5%, I’d receive annual passive income of £15,025.
That’s without adding another penny beyond platforms fees. However, if I regularly invested along the way, the final figures would obviously be much higher.
