£5,000 in cash? Here’s how I’d aim for a second income worth £3,815

Millions of us worldwide invest in stocks for a second income. Here, Dr James Fox picks one stock he thinks will help build up his portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Most of us, maybe all of us, would love a second income. Whether that’s to help us pay for bills, cover the cost of leasing a car, or something that makes those summer holidays a little more achievable. A second income is certainly a boost.

And, of course, if I’m a UK resident, it can all be tax free if I invest through a Stocks and Shares ISA. This incredibly useful vehicle protects my wealth generation from capital gains and my second income from tax.

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.

Getting started

Let’s imagine I’ve got £5,000 to kick off my investment journey. Well, the first thing I’m going to have to do is open an investment account. I use Hargreaves Lansdown, but it’s expensive. There are a range of alternatives including AJ Bell and Robinhood UK. And of course, I’m going to want to use the ISA if I can.

Next, I need a strategy. I need to recognise that £5,000 isn’t going to get me a substantial second income right away. In fact, £5,000 could probably only bring in around £350 a year, assuming I invested in stocks with an average 7% dividend yield — it’d be hard to achieve much better.

So how will I build my £5,000 into something much bigger? Well, I need to consider contributing more money, perhaps a small percentage of my salary, or maybe £200 a month. And I also need to reinvest my portfolio’s earnings each year so that my gains compound.

After just 10 years, and hoping for a strong return of 10% annually (which is by no means guaranteed), I could grow my £5,000 into £54,503. This would be enough for me to generate £3,815 a year — a considerable improvement from just £350.

Created at thecalculatorsite.com

Investing for growth

Of course, the first phase isn’t about investing for dividends. It’s about investing to grow my portfolio so I can draw a larger passive income in the future. So where should I invest?

GigaCloud Technology (NASDAQ:GCT) is a little volatile, but I think it’s simply underappreciated. I invest in GigaCloud as part of a diverse group of holdings because it I’m hoping it will realise fair value and in turn help my portfolio grow into something that can generate a substantial passive income.

The company, despite its tech-focused name, connects furniture manufacturers, predominantly in China, with resellers and customers in North America and Europe.

Disruption to global shipping does pose a risk to this full-solution company, but management recently said that the Houthi activity in Bab el-Mandeb strait was having limited impact as GigaCloud’s largest market is North America.

Nonetheless, its rise has been phenomenal over the past 12 months, with revenues increasing 94.8%. Moreover, it’s very cheap. The company is trading at 11.15 times earnings for 2024, 9.4 times earnings for 2025, and 6.9 times earnings for 2026.

I appreciate the company raises some alarm bells. It’s clearly not the American firm it claims to be — it’s Chinese. But its earnings trajectory is hugely exciting. It fact, earnings are expecting to grow by another 71.9% over the next 12 months. It’s an impressive story.

Finally, it’s got momentum on its side. The stock is up a considerable 478% over the past 12 months. It could go higher based on the metrics above.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has positions in GigaCloud Technology Inc, and Hargreaves Lansdown Plc. The Motley Fool UK has recommended Hargreaves Lansdown Plc. 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.

More on Investing Articles

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »