With the cost-of-living crisis raging on, having a second income isn’t just helpful anymore, it’s increasingly becoming critical.
The good news is that the UK stock market is home to plenty of high-yielding income stocks, making this entirely achievable. And even starting with just £25, it’s possible to get the ball rolling towards unlocking a £1,000 passive income. Here’s how…
The maths behind £1,000 a year
By focusing on higher-yielding UK shares, it’s possible to earn a yield close to 6% without taking on excessive additional risk. And at that yield, a portfolio would need to be worth around £16,667 to generate £1,000 a year.
So how does £25 turn into over £16k? On its own, it simply won’t. At least, not without extreme levels of luck. But if by investing £25 consistently every week, the picture changes completely.
Assuming a portfolio matches the stock market’s long-term average return of 8% annualised, investing £25 a week would grow into roughly £16,687 in just under nine years when starting from absolutely nothing.
That’s the power of consistent compounding doing the heavy lifting, not luck. And once that milestone’s reached, the next question becomes obvious: which dividend shares should investors actually be considering?
A steady income compounder worth a look
Out of all the income shares on the London Stock Exchange today, Standard Life (LSE:SDLF) looks like an interesting idea to dig into. Even more so given the retirement savings and annuities specialist (formerly known as Phoenix Group) currently offers a yield close to 6%.
Its latest annual results show real momentum building. Underlying operating profits climbed 15% to £945m, while operating cash generation rose 5% to £1,474m, comfortably covering a total dividend of 55.40p per share, which also received a tasty 2.6% boost this year.
As CEO Andy Briggs put it, the company’s “firmly on track to deliver our 2026 financial targets, building momentum by continuing to sharpen our competitive position in one of the world’s most attractive savings and retirement markets.”
What’s the catch?
No income stock is ever without risk. And Standard Life is no exception. When looking at the reported earnings rather than adjusted figures, the company actually showed a £394m after-tax cash loss last year. This is where the complex accounting practises of financial institutions start to muddy the water, as most of this loss didn’t actually impact cash flows.
In other words, on paper, the business looks like it’s in a dire state. In practise, that’s not the case. But it requires more thorough analysis to understand what’s actually going on under the hood. And this complexity isn’t always hiding the good stuff. It could also be masking far bigger risks that investors miss.
