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With inflation still running ahead of target and the cost of living continuing to rise, earning a second income from doing very little remains an attractive prospect. That’s why lots of people buy dividend shares. And with a bit of thought and some careful research, I reckon it’s possible to earn a five-figure second income. Here’s how.
One approach
Given the financial pressures I’ve just described, it’s unlikely that many people will have a large sum to invest, especially those in their twenties. However, by investing little and often, I think it’s possible to build up a decent nest egg that could produce a second income for later in life.
Let’s assume that it’s possible to find £100 a month. Based on this amount, the table below shows various combinations of timescales and rates of return to give an idea of how an ISA might grow.
| Period (years)/return | 5% | 6% | 7% | 8% |
|---|---|---|---|---|
| 15 | 26,590 | 28,830 | 31,286 | 33,977 |
| 20 | 40,745 | 45,564 | 51,040 | 57,266 |
| 25 | 58,812 | 67,958 | 78,746 | 91,483 |
| 30 | 81,869 | 97,925 | 117,606 | 141,761 |
To give some idea at to what’s possible, the average annual return (with dividends reinvested) on the FTSE 100 from 2016 to 2025 was 7.9%. Over this period, the best year was 2025 (25.8%) and the worst was 2020 (-11.5%).
What’s next?
Now let’s see how much of a second income could be generated by taking the highest amount in the table (£141,761) and assuming it’s used to create a portfolio of dividend-paying shares.
| Yield | Annual second income (£) | Monthly equivalent (£) |
|---|---|---|
| 4% | 5,670 | 473 |
| 5% | 7,088 | 591 |
| 6% | 8,506 | 709 |
| 7% | 9,923 | 827 |
| 8% | 11,341 | 945 |
For context, the highest amount is just over £600 less than the State Pension for someone with a full record of contributions.
Laying the foundations for a second income
One share that I think’s worth considering as part of a diversified portfolio of dividend stocks is Persimmon (LSE:PSN). For 2025, I believe it’s going to pay 60p a share, although the consensus of analysts is 64p.
If I’m right, the stock’s currently (6 February) yielding 4.2%. It wasn’t that long ago – 2022, in fact – that its payout was 235p. At the time, the yield was close to double digits. But the pandemic played havoc with completions, margins, and earnings, with the dividend suffering as a result.
Even so, I think the group’s directors deserve a pat on the back for getting the business through the pandemic relatively unscathed. The group doesn’t have any debt on its balance sheet and it has lots of land on which to build. Its properties are also cheaper than its rivals.
And I think there are some early signs that the worst could be over for the housing market. But recoveries are rarely smooth so there are likely to be a few bumps along the way. However, interest rates are widely expected to fall further, making mortgages more affordable.
Structurally, there remains an under-supply of houses. The government’s also trying to remove certain planning restrictions that have historically been a barrier to housebuilding.
Persimmon and other housebuilders will benefit if confidence returns to the market. If it does, there will be plenty of scope for the group to increase its dividend further. Analysts are expecting a 2027 dividend of 72.46p, implying a forward yield of 5.1%. Of course, there can be no guarantees.
UK investors have a large number of dividend shares from which to choose. And I reckon those looking to establish a second income stream could consider Persimmon for their Stocks and Shares ISAs.
