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How nice would it be to have a solid, passive second income in one day?
While this is still a dream for many people, some have already made it a reality. And the good news for UK investors is that it can be achieved tax-free through a stocks and Shares ISA.
If you had £20k sitting idle today, here's how you'd invest it for an eye-catching second income in the future.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Taking action
To get things going, I would put 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 stock market return easily outperforms cash over the long term.
A stocks and shares ISA gives me almost endless investment options. I could invest my money in stocks like the owner of facebook Metaplatforms either amazon.
Or UK dividend stocks like Lloyd's, tesco and HSBC. They periodically distribute a part of their profits to shareholders.
To diversify, I could buy exchange-traded funds or investment trusts. This would give me instant exposure to many stocks at once.
A UK Stock I Like
So one option is to let a professional manager invest for me. I don't mean visiting one in an office. I mean investing in funds managed by professionals who pick stocks.
If I were just starting out, one FTSE 250 The option I would consider is Baillie Gifford US Growth Trust (LSE: USA).
As its name indicates, it is a trust that invests in growth stocks listed in the United States. Some of them will look familiar, like the leader in artificial intelligence. NVIDIA and streaming giant Netflixbut some are darker.
However, that is the point. I am confident that managers will pick a portfolio of (mostly) winners, to help drive returns. Hopefully some will be hidden gems.
What I especially like here is that the portfolio has a number of exceptional private companies. In fact, the current top holding (with a weighting of around 7%) is SpaceX, Elon Musk's unlisted space exploration company.
The company has pioneered reusable rockets, which has significantly reduced launch costs. This allows it to offer competitive prices for satellite launches and other space missions.
The company just launched its 5,999th Starlink satellite into orbit, and this was the 307th time SpaceX has landed its booster rocket.
Reports suggest that revenue from Starlink, its direct-to-consumer satellite Internet system, will rise to around $6.6 billion this year, up from just $1.4 billion 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 could turn out to be a bargain.
The road to £15,025
Now, despite my enthusiasm, growth stocks can be very volatile. Using rocket metaphors, they have a tendency to crash and burn or go to the moon. Poor performance is a risk.
However, assuming a share portfolio like this collectively returned an average of 8.5% a year, my £20,000 would increase to £231,165 after 30 years. This is with dividends reinvested.
At this point, if you switched entirely to dividend stocks yielding an average of 6.5%, you would receive an annual passive income of £15,025.
That's without adding a single cent beyond platform fees. However, if you were to invest regularly along the way, the final figures would obviously be much higher.
