How much do I need in the stock market to earn a second income of £1,667 every month?
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To earn a solid income of £1,667 a month in the stock market you would need around £500,000 invested. This is based on a recommended withdrawal rule of 4%, assuming a potential retirement of 30 years.
Half a million is a big number. But with strong savings, ISA tax benefits, and the miracle of compounding returns, it’s not as crazy as it sounds. With a Dividends and Dividends ISA, UK investors pay no tax on capital gains or dividends. That makes a big difference in 10-20 years.
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.
Converting regular savings to £500k
Imagine starting by using the ISA’s limit of Stocks and Shares to invest £20,000, then continuing to add £500 every month for years after that opening year. The key is to invest in strong dividend stocks and reinvest all returns over the years.
Let’s say the portfolio returns about 10% per year on average (price growth and dividends). A lump sum, say £20,000 up front and £6,000 a year in contributions, can grow to around £500,000 over 20 years – if the markets play football. That’s because the pot doesn’t just grow from your £500 per month, but also from the growth of all money already invested.
In the early years it feels slow, but after ten years, the growth is fast.
A perfect example
The Compass Group (LSE: CPG) manages food and support services for organizations worldwide. It has long, sticky contracts and serves millions of meals a day, making its income stable.
In the last 20 years, its price has increased by about 430%, which works out to about 9% per year in price growth. In addition, its dividends typically yield 1%-2% per year, taking the total return to more than 10%. That kind of compounding is exactly the kind of pattern the long-term ISA investor is trying to copy.
Recent results support the ‘steady compounder’ story. In its full-year 2024 numbers, it reported revenue of about $42bn, up about 11% year-on-year, and increased its operating margin to about 7.1%. Earnings per share (EPS) and free cash flow have both grown significantly, and return on operating income (ROCE) remains in the high to mid-20s – impressive for a large, mature business.
Pros, cons and dangers
Compass looks attractive because it works in everyday places such as workplaces and dining areas. With strong demand, it has delivered strong growth and profitability over many years, paying growing dividends with a yield of around 2%. This is supported by a reasonable payout ratio of around 60%, leaving room for reinvestment and expansion.
However, that profit pales in comparison to the UK’s most popular shares.
On the risk side, rising wages and food inflation could reduce ratings if Compass can’t fully cover costs. As it often trades at a premium to the wider FTSE, investors are already paying a premium. Yes, it’s a high quality company, but it has to keep delivering or risk a fix.
An important point
For the British saver considering an ISA for retirement, a stock like Compass is a long-term asset to consider. It’s not a get-rich-quick game, rather a business with the kind of strong, inclusive profile that makes reaching a £500,000 portfolio within a few decades a realistic goal.
