Earning a second income in the stock market isn’t a pipe dream. I do it, and so do countless other investors who own dividend shares. And with enough time and capital, earning up to £650 each month without having to lift a finger is a real and achievable target that even modest investors can achieve.
Here’s how.
Investing for passive income
When it comes to income stocks, UK investors have a massive advantage.
The London Stock Exchange is home to some of the most generous dividend-paying enterprises on the planet. And while the FTSE 100’s latest rally has lowered the average yield on index funds to around 3%, there are still plenty of individual businesses in the UK’s flagship index offering substantially more.
In fact, it’s not too difficult to build a diversified portfolio that generates close to 5% per year from dividends alone. And at this rate, to earn that second income of £650 per month or £7,800 per year, a portfolio would need to be worth roughly £156,000, instead of the £260,000 needed when relying solely on FTSE 100 index funds.
And even when starting from scratch, putting aside £500 each month and investing it at an average 8% rate could build this nest egg in roughly 14 years.
Picking quality dividend stocks
There are currently over 65 companies across the FTSE 100 and FTSE 250 offering at least 5%, with some even venturing into double-digit territory.
However, it’s important to remember that dividends are never guaranteed. When times are tough, management teams are free to reduce or even outright cancel their payments to shareholders. And suddenly, ill-informed investors can find themselves losing a large chunk of their second income seemingly overnight.
Fortunately, by understanding and analysing the underlying business, investors can reduce their chances of falling into these income traps.
An example: Admiral
Let’s look at Admiral Group (LSE:ADM) – the UK’s largest automotive insurance business and a FTSE 100 stock paying a 5.8% yield today.
Looking at its latest financials, the business is thriving. Pre-tax profits across the first six months of 2025 surged by 69%, its number of customers has grown to over 11.4 million, and its solvency ratio stands at a rock-solid 194%. These are all encouraging indicators of strong financial health backed by robust cash flows that more than cover shareholder payouts.
However, while the business is performing admirably right now, there are some looming headwinds for investors to consider carefully.
Like many insurance groups, Admiral has been cutting the prices of its insurance policies. That’s great for attracting new customers. But since automotive policies are often issued on a 12-month basis, it can take up to 18 months for this impact to materialise on the financial statements.
In other words, as we move into 2026, the recent price-cutting activity could start to negatively impact earnings, putting pressure on dividends.
This uncertainty is why Admiral shares have been on a bit of a downward trajectory since August 2025. And while it doesn’t guarantee dividends will be cut, the risk is nonetheless there.
Nevertheless, with an impressive track record of strategic positioning and outmanoeuvring the competition, Admiral shares could still be worth a closer look for investors seeking a second income. And it’s not the only 5%+ yielding opportunity out there today.
