If you have a good lump sum of savings in the bank, you could instantly unlock a passive income by using this money to invest in quality dividend-paying UK shares. But with the right investments, this income stream could gradually become far more substantial over time.
So let’s say an investor has £9,000 sat on the sidelines. How much could dividends generate today? And how much could this be worth in the future?
What’s the income potential?
Here in the UK, the FTSE 100 is by far the most popular destination for capital. And right now, it offers an overall dividend yield of 2.93%. That means if I were to invest £9,000 today in a low-cost index tracker, my portfolio would now generate a £263.70 passive income overnight.
On the surface, that’s not much different to a much-lower-risk savings account. But the key advantage of the stock market is that, unlike a savings account, the yield gradually increases in line with company earnings.
Looking again at the FTSE 100, over the last decade, dividends have increased by an average of 3.3% on an annualised basis. And assuming this trend continues over the next 10 years, the £263.70 dividend income today could grow to £364.85.
Yet, could stock pickers potentially earn even more?
A bigger income opportunity?
Instead of relying on index funds, investors can craft a custom portfolio. This requires a lot more effort and discipline. But it also opens the door to potentially life-changing returns as long-term investors in Diploma (LSE:DPLM) have learned first-hand.
Ten years ago, the value-add distributor of industrial products and services only offered a modest payout of 2.73%. But with the business proving to be a free cash flow generating machine, Diploma’s grown its dividends each year by an average of 13.1% — almost four times what FTSE 100 index investors have enjoyed.
In terms of money, that means anyone who invested £9,000 in April 2016 has gone from earning a £245.70 passive income to £764.42 today. And if all this money had been automatically reinvested, the initial £9,000 would now be worth £95,721.30!
Clearly, Diploma has been a fantastic investment. But is it still worth buying today?
Does Diploma hold up in 2026?
While selling specialised wiring, fasteners, and seals, among other industrial products, is hardly an exciting business model, it’s nonetheless a critical one. And it’s why just last month, the company announced a significant upgrade in its 2026 full-year guidance, raising organic growth and profit margin expectations.
Its strategy of continuously executing bolt-on acquisitions and then improving its acquired businesses has proven to be a winning formula. But sadly, that doesn’t make it a guaranteed winner in the future.
Acquisitions, even smaller digestible ones, still come with significant execution and integration risk. And unexpected delays are a notorious source of value destruction and cost overruns in this type of dealmaking, especially in more complex sectors like aerospace and life sciences.
Nevertheless, in my opinion, Diploma’s quality and track record make this a risk worth considering, especially given its increased dividends for 20 years in a row. And while new investors today may only enjoy a 0.89% yield on day one, left to run, this could become far more substantial further down the line.
