Forget dividend shares. Are growth stocks the real path to a lucrative second income?

Dividends are great, but this Fool UK writer is considering the future prospects of two promising UK growth shares to earn a second income.

| 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.

When discussing a second income, I talk about dividend stocks a lot. I’m not going to sugar coat it – I like them because the returns are predictable. I often know months before what payouts I can expect. As such, I can plan my finances accordingly. 

That’s the beauty of dividends.

But all that stability and reliability comes at a price. While other stocks — that is, growth stocks — may be less predictable, they sometimes deliver greater returns. The trick to evaluating such a stock’s reliability is comparing its past performance with its future prospects. Some of the best are new companies with little history but a promising future. Others have a 100-year+ track record of success but no guarantee it will continue.

Should you invest £1,000 in Sainsbury's right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Sainsbury's made the list?

See the 6 stocks

Consider the following two FTSE 100 shares.

Experian

Dublin-based Experian (LSE: EXPN) is one of the most popular credit reporting firms in the world. It faces some competition from US firm Equifax and to a lesser degree TransUnion, but is a leader in the EU market. 

Recently it resurfaced on my radar following positive ratings from several brokers, including Barclays, Jefferies, Shore Capital and Morgan Stanley. That gives me a lot of confidence in its future performance.

Experian also ticks all the boxes when it comes to past performance. It’s up 28% in the past year and 55% over five years, with annualised returns of 9.22%. Looking over the past decade is even more impressive, up 262% with annualised returns of 13.7%. That’s significantly higher than the FTSE 100 average of 7.5%.

Created with Highcharts 11.4.3Experian Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Naturally, being a growth stock, it has an insignificant dividend yield of 1.26%. So if growth doesn’t materialise, it won’t provide any additional returns. But more concerning, the share price is near an all-time high and overvalued by 9.8% based on future cash flow estimates. Plus, the price-to-earnings (P/E) ratio is a lot higher than the industry average. 

This doesn’t negate the future prospects but could result in a mild short-term correction. Yet I would still consider it a good long-term buy.

Antofagasta

Founded in Chile in 1888, Antofagasta (LSE: ANTO) is a long-established mining company that’s done well recently. It’s up 70% in the past year alone, and 196% over five years. That’s a 24.2% annualised return! Even over 20 years, annualised returns are high at 13.8%. 

Created with Highcharts 11.4.3Antofagasta Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

That’s very promising past performance – but will it continue?

The miner’s key product is copper, a metal that’s vital for almost all implementations of renewable energy. Anybody who hasn’t been living under a rock knows that should mean profit. The International Energy Agency (IEA) predicts that renewable energy will soon surpass coal to become the world’s top source of electricity. 

But mining is a high-risk industry. Antofagasta faces not only stiff competition from fellow miners but significant geopolitical risks. It operates in countries that face threats both internally and from neighbouring nations. Its staffing, logistics, and supply chain operations all rely on the stability of several regions, so keeping profits flowing is a careful balancing act.

As they say – no risk, no reward! 

While past performance is good, I don’t think now is the time to consider this one. Barclays, HSBC and JP Morgan have all reduced their positions in Antofagasta in the past month. While it ticks the past performance box, future growth is uncertain.

Should you buy Sainsbury's shares today?

Before you decide, please take a moment to review this first.

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Claim your free copy now

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.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Mark Hartley has positions in Barclays Plc and HSBC Holdings. The Motley Fool UK has recommended Barclays Plc, Experian Plc, and HSBC Holdings. 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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

Worried about the future of the Cash ISA? Consider investing like this for potentially great returns

The Cash ISA is tipped for massive changes in the coming months. This could provide fresh opportunities for savers, says…

Read more »

Investing Articles

£20k across this FTSE 100 share and ETF would have more than DOUBLED in just 5 years!

Looking for ways to supercharge your stocks portfolio? Consider a lump sum investment in this FTSE 100 share and this…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Just released: our 3 top small-cap stocks to consider buying before March [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

As the British American Tobacco share price drops 10%, should investors buy the dip?

A share price slump has pushed British American Tobacco's dividend yield over 8%. Should investors consider buying this FTSE 100…

Read more »

Investing Articles

Prediction: this investment trust will easily outperform the FTSE 250

Our writer shines the spotlight on a FTSE 250 investment trust that he thinks looks set up for strong long-term…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Should I buy more BAE Systems shares for my Stocks and Shares ISA?

This investor in BAE Systems shares takes a look at the FTSE 100 defence firm's annual results to decide if…

Read more »

Investing Articles

Does this news mean a fresh start for the Centrica share price?

The Centrica share price has gone nowhere over the last year. But the stock has spiked following strong results and…

Read more »

Investing Articles

2 UK dividend shares that aren’t what they seem

Investors need to look carefully when it comes to dividend shares. Sometimes the actual yield can be higher or lower…

Read more »