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

The third Monday in January is often called ‘Blue Monday’. Apparently this is when we all get cold, cold, and fall back into the metaphorical realm. For many, it would be nice to have a second income to call upon.

Here, I will explore how £20k of savings can be used in the stock market to lay the foundations for this sum.

The journey begins

Ultimately, there were almost 4m Stocks and Shares ISA accounts registered in the UK.

I’m not surprised anymore, 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 the returns, including income.

As a result, it is possible to build wealth very quickly in a Stocks and Shares ISA. And this makes them a no-brainer for new investors, in my opinion.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content of this article is provided for informational purposes only. It is not intended to be, and does not constitute, any form of tax advice. Students are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.

But what is the real benefit?

According to recent data, the average annual return on Stocks and Shares ISAs is less than 10%.

However, that does not mean that all investors enjoy that return every year. The stock market does not rise in a linear fashion and individual stocks fall, while dividends are not guaranteed.

For example, i S&P 500 increased by 23.3% in the year 2024. This was largely driven by stocks related to artificial intelligence (AI), in particular. Palantir Technologies (up to 360%) again Nvidia (+177%).

Overall, 66% of stocks delivered positive returns for the year, which means 34% did not. Obviously, some people lose money in the stock market, while others make higher than average profits.

But I think 10% is a realistic long-term goal for most investors, as the ISA return figures show.

Which stocks should you consider buying?

An investor can buy dividend stocks, 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 the shares myself.

I FTSE 100 the company is a partner of The Coca-Cola Company. It controls bottling, distribution, and sales in 28 markets across Europe and Africa, while the US soda giant oversees product development and formulas.

There are a few things I like here. First, its product portfolio is surprisingly strong, including Schweppes, He knows, Sprite, Costa Coffee drinks, and of course Coke. These high-quality products enable pricing power.

Second, despite high inflation and weak consumer spending, Coca-Cola HBC is still growing. This year, City analysts expect it to increase its earnings by about 10.7%. And this is expected to grow up to 10% of the profit. The forward yield is 3.35%.

In the end, the equation seems reasonable. Currently, the price-to-earnings (P/E) ratio is 13.5, broadly in line with the broader FTSE 100.

Another risk that should be mentioned is the ongoing boycott of popular US products in Muslim-majority countries due to America’s support for Israel in Gaza. For the company, these include Egypt and Bosnia.

Up to £50k

Twenty grand alone isn’t enough to generate a second big income, but it can lay the groundwork.

If an investor adds another £500 a month, and reinvests the earnings instead of spending them, then their ISA will grow to £833,821 after 25 years.

At this point, a portfolio yielding 6% could lose £50,029 a year in dividends.