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There are lots of ways to earn a second income. But investing in high-quality stocks is among the easiest methods for those willing to take on a bit of risk. And when it comes to dividend-paying stocks, few come close to the popularity of Lloyds‘ (LSE:LLOY) shares.
The leading British bank has had a phenomenal run in 2025, with its market-cap climbing by over 70%, far outpacing the FTSE 100. In fact, this momentum’s pushed the back stock to its highest level since the 2008 financial crisis. And yet, it still offers an index-beating dividend yield of 3.6%.
With a dividend per share of 3.33p, investors can unlock a £1,000 second income stream by simply buying roughly 30,000 shares. And looking at where the bank stock’s currently trading, such a transaction would cost around £28,000.
That’s certainly a meaningful lump sum of capital. But even smaller investors can still tap into this income opportunity by gradually building their position over time. And it’s still a lot faster than relying on the 3.1% yield of a FTSE 100 index fund.
But is it actually a good investment?
The power of higher interest rates
For most businesses, higher interest rates can be quite challenging. After all, it drives up the cost of debt, slows consumer spending, and makes it far more challenging to execute ambition growth strategies. Yet for banks like Lloyds, higher rates have proven to be enormously beneficial.
Wider lending margins have drastically boosted earnings. Subsequently, management’s raised its full-year 2025 profit guidance and even delivered an underlying return on tangible equity of 14.6% in its latest third-quarter results.
Combining this momentum with rising levels of mortgage volumes, with relatively stable default rates and credit impairment charges, investor sentiment’s drastically improved. Even more so with uncertainty surrounding the motor finance scandal starting to dissipate.
Insider buying activity has started heating up, and analysts are upgrading their share price targets. All in all, it seems Lloyds is firing on all cylinders. As does its dividend.
What’s the catch
Lloyds’ performance in 2025 has undeniably been impressive. However, like every business, there are still some notable threats on the horizon for investors to watch carefully.
The bank remains highly sensitive to the UK economic landscape. Recent interest rate cuts by the Bank of England are undoubtedly helping boost mortgage volumes, but consumer spending remains weak. And with fears of higher taxes for consumers and businesses alike in the upcoming UK Autumn Budget, economic growth may continue to prove elusive.
In other words, despite the recent strengthening of Lloyds’ financials, numerous macroeconomic headwinds are rising. These might ultimately handicap the bank’s ability to keep up its current momentum. And with a payout ratio of roughly 70%, dividends could end up on the chopping block if profits start to reverse.
The bottom line
All things considered, Lloyds’ rally is certainly justified given the immense improvement in the bank’s financials. And even with risks potentially around the corner, investors seeking to earn a second income from the British banking sector may want to consider investigating further.
However, personally, I think there are even better opportunities within the financial sector to explore.
