The idea of earning money while I sleep was one of the reasons I first became interested in the UK stock market. With dividend-paying companies, all you need to do is own some shares to earn income from them. No need to work extra shifts or run a side hustle.
That doesn’t mean income investing is effortless or risk-free. Share prices move, companies face difficult trading conditions and dividends can be reduced.
But with patience, commitment, and a diversified portfolio, even a novice investor can work towards a meaningful second income.
Surely, it can’t be that easy? Let’s have a look.
Start with the income target
To start off, set a realistic target. In this example: £500 a month (£6,000 a year). The exact capital required to bring in that much income from dividends depends heavily on the portfolio’s average dividend yield.
Here’s a few scenarios:
| Yield | Amount required for £6,000 a year |
|---|---|
| 5% | £120,000 |
| 6% | £100,000 |
| 7% | £85,714 |
That gives you an idea of how much you’ll need invested. But these figures are illustrations, not promises. A higher yield is attractive, but can signal greater risk. It’s better to focus on combining reliable income with the possibility of dividend growth. While building the portfolio, you can reinvest dividends to compound growth and then consider taking the income later.
But remember: dividends are discretionary and even a long-established company can cut or suspend them.
To find reliable stocks, carefully examine profits, cash generation, debt and the proportion of earnings paid out. To reduce risk, try to spread your investments across several stocks in a wide range of different sectors and regions.
For a UK investor, a Stocks and Shares ISA is a great way to reduce tax liabilities and grow the pot even quicker.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
A practical example
Alumasc Group (LSE:ALU) is a building products and services supplier, and a good example of the kind of companies I look at when targeting dividend income.
Its last set of full-year results, (up to 30 June 2025), showed revenue rising 13% to £113.4m. The company proposed a total dividend of 11.1p a share, up from 10.75p, while its latest interim results maintained the 3.5p interim dividend despite a challenging UK market.
With a yield that tends to hover around the 5% mark and a payout ratio near 53%, it has solid dividend credentials. Various data sources show a trailing price-to-earnings (P/E) ratio around 10.5, suggesting good value at the current price.
Construction is a fairly in-demand industry, but it still faces risks. Project delays and rising costs are key issues that threaten Alumasc’s margins – and if cash dries up, dividends could be cut. It may have a low payout ratio now, but things can change quickly in a tough market.
The bigger picture
Alumasc is just one example of the kind of stocks I look for, and it definitely deserves further research. Ideally, it should be mixed in with a diverse collection of larger dividend payers with similar income strength and financial resilience.
A £500 monthly income is achievable but only as a long-term target – there are no shortcuts. The real work is finding businesses that can keep generating cash and then sticking to your investment plan with conviction, even when markets get choppy.
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Mark Hartley does not hold any positions in the companies mentioned.
