Investing in stocks and shares allows us to earn a second income by leveraging their growth and payments to shareholders in the form of dividends. While many people in the UK may prefer other routes, like Investing in buy-to-let properties, I believe stocks and shares offer the best returns and the most flexibility.
So, how can I turn a £200 monthly contribution into a much larger second income? Let’s find out.
Compounding is key
£200 a month, or £2,400 a year might not sound like a lot of money to put aside, but it adds up over time. In fact, £200 a month is how much I put into my daughter’s Stocks and Shares ISA each month, and it’s adding up nicely. After five months, we’ve experienced 30% growth in addition to the monthly contributions.
Of course, it’s unlikely that this pace of growth is sustainable across the next 18 years, but growth compounds. So, even if my current growth moderates to around 10% per annum — I’m still aiming for a lot more — she’d have £121,113 when she ‘becomes an adult’.
I say this for illustrative purposes as there are many variations as to how we could get to our desired endpoint. If I continued with £200 a month, achieving 10% growth annually, I’d have enough capital to generate £36,469 annually.
However, this requires me to grow me portfolio sensibly over three decades. It’s entirely achievable, because growth compounds. But I need to recognise that poor investment decisions can lose me money.
Growing my portfolio
There are several exceptions, but I tend to look to the US for my growth-oriented investments. Nvidia, Super Micro, Powell Industries, CRISPR Therapeutics are among the investments I’ve made over the past year that have yielded more than 50%.
AppLovin (NASDAQ:APP) is another investment which was been good to me. But I still like it a lot and I’m considering investing more.
AppLovin is a software company specialising in maximising advertising revenue for its clients. It operates within a thriving industry and a great track record of beating market expectations — that’s a great sign.
One area of concern is that its still quite indebted and growth has been unstable historically. However, over the past year, it’s been thriving in tough conditions.
In the fourth quarter, AppLovin reported a earnings per share of $0.49, surpassing expectations by $0.14. Furthermore, revenue for the quarter amounted to $953.26m, marking a significant year-over-year increase of 35.7% and surpassing estimates by $25.23 million.
Nonetheless, the most compelling aspect of AppLovin lies in its projected growth over the medium term, spanning the next three to five years. Although the stock’s forward price-to-earnings ratio stands at a relatively high 31 times, its price-to-earnings-to-growth ratio is an attractive 0.62. This suggests that AppLovin’s growth potential may be undervalued. In fact, on a forward basis, the stock is trading at a modest 13.7 times earnings.
This post was originally published on Motley Fool
