Traders in January 2025 had been shopping for into the sort of investments that may construct up to a wholesome long-term second revenue. However what they’ve truly been stashing of their ISAs may come as a little bit of a shock.

I do hope they’re all ploughing no matter dividend revenue they earn again into extra shares. Failing to try this can actually undermine the potential advantages of a Shares and Shares ISA. Over many years, the portion of the ultimate worth of an ISA from reinvested dividends can eclipse the worth of the money we initially put down.

I’ll use Taylor Wimpey (LSE: TW.) for instance to point out what I imply. It was one of many most-bought shares at Hargreaves Lansdown in January, regardless of US progress shares like Nvidia and Tesla being massive on buyers’ purchase lists.

Compound it

Taylor Wimpey is on a forecast dividend yield of 8.4%. That’s excessive by FTSE 100 requirements. And it’s largely as a consequence of Taylor Wimpey shares falling 50% prior to now 5 years. The identical dividend cash means an even bigger proportion yield.

Within the coming years, I’d hope to see the Taylor Wimpey share price regain some floor. And over the long run, I’d additionally anticipate the dividend to develop in cash phrases. On steadiness, I’d anticipate the 2 to even out to a dividend yield nearer to the FTSE 100 long-term common of round 4%.

However there are not any ensures with dividends. And I nonetheless see potential tough instances instances forward for home builders earlier than issues actually get higher.

For illustration, £10,000 invested in Taylor Wimpey shares with an annual 8.4% dividend might generate complete money of £16,800 over 20 years. However shopping for new shares with the cash every year would imply subsequent 12 months there would even be 8.4% of this 12 months’s 8.4%, and so forth. After 20 years it might compound up to a revenue of greater than £40,100, nicely over twice as a lot.

Progress works too

Whereas dividend shares may appear apparent for constructing up an even bigger and larger second revenue, they’re not obligatory. If we don’t wish to draw down the revenue but, shopping for progress shares could make good sense.

In January, these HL clients had been additionally shopping for Broadcom, Alphabet, and others associated to synthetic intelligence (AI). In addition they favored GSK, with a 4.5% forecast dividend, so there’s nonetheless a good steadiness.

Funding trusts are excessive in reputation. At Barclays, Scottish Mortgage Funding Belief has been February’s hottest. So tech shares do appear to be the flavour of the 12 months to this point. However Metropolis of London Funding Belief can also be within the prime 10 with a 4.8% dividend, having raised it for 58 years in a row.

Complete returns

Attaining the largest potential second revenue from shares comes down to 1 key factor. Complete returns matter, whether or not from dividends or progress. As we get nearer to needing the money, we are able to begin to promote our progress shares and transfer into dividends.

That’s what a number of the UK’s Shares and Shares ISA millionaires do. And it might assist scale back the danger a bit too.