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Investors in January 2025 were buying into the kind of investments that can build up to a healthy long-term second income. But what they’ve actually been stashing in their ISAs might come as a bit of a surprise.
I do hope they’re all ploughing whatever dividend income they earn back into more shares. Failing to do that can really undermine the possible benefits of a Stocks and Shares ISA. Over decades, the portion of the final value of an ISA from reinvested dividends can eclipse the value of the cash we initially put down.
I’ll use Taylor Wimpey (LSE: TW.) as an example to show what I mean. It was one of the most-bought stocks at Hargreaves Lansdown in January, despite US growth stocks like Nvidia and Tesla being big on investors’ buy lists.
Compound it
Taylor Wimpey is on a forecast dividend yield of 8.4%. That’s high by FTSE 100 standards. And it’s largely due to Taylor Wimpey shares falling 50% in the past five years. The same dividend money means a bigger percentage yield.
In the coming years, I’d hope to see the Taylor Wimpey share price regain some ground. And over the long term, I’d also expect the dividend to grow in money terms. On balance, I’d expect the two to even out to a dividend yield closer to the FTSE 100 long-term average of around 4%.
But there are no guarantees with dividends. And I still see possible rough times times ahead for house builders before things really get better.
For illustration, £10,000 invested in Taylor Wimpey shares with an annual 8.4% dividend could generate total cash of £16,800 over 20 years. But buying new shares with the money each year would mean next year there would also be 8.4% of this year’s 8.4%, and so on. After 20 years it could compound up to a profit of more than £40,100, well over twice as much.
Growth works too
While dividend shares might seem obvious for building up a bigger and bigger second income, they’re not necessary. If we don’t want to draw down the income yet, buying growth shares can make good sense.
In January, those HL customers were also buying Broadcom, Alphabet, and others related to artificial intelligence (AI). They also liked GSK, with a 4.5% forecast dividend, so there’s still a fair balance.
Investment trusts are high in popularity. At Barclays, Scottish Mortgage Investment Trust has been February’s most popular. So tech stocks do seem to be the flavour of the year so far. But City of London Investment Trust is also in the top 10 with a 4.8% dividend, having raised it for 58 years in a row.
Total returns
Achieving the biggest possible second income from shares comes down to one key thing. Total returns matter, whether from dividends or growth. As we get closer to needing the cash, we can start to sell our growth stocks and move into dividends.
That’s what a lot of the UK’s Stocks and Shares ISA millionaires do. And it can help reduce the risk a bit too.