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With the cost of living on the rise, having even a small second income can make an enormous difference. And by investing in dividend-paying stocks, this can even be achieved almost overnight. But how much money can an investor realistically earn with £5,000?
Crunching the numbers
On average, the UK stock market offers a dividend yield of 4%. At this rate, a £5,000 lump sum investment would earn £200. Of course, there are plenty of stocks offering more impressive yields. And a portfolio could realistically generate up to 6%, or £300, without taking on too much additional excessive risk.
But what if someone wanted to earn £1,000? That’s the equivalent of a 20% yield. And while a few UK shares offer such a handsome payout, these are almost never sustainable, often resulting in substantial payout cuts that come paired with significant share price dips.
Yet, for intelligent investors with a longer time horizon, earning a £1,000 passive income from an initial £5,000 investment isn’t as impossible as most might think.
The power of dividend growth
Rather than focusing on the highest-yielding stocks right now, income investors can potentially earn enormous payouts by zooming in on the businesses that can consistently increase dividends over time.
These are typically the firms that generate substantial free cash flow. And a perfect recent example of this in action is real estate investment trust (REIT) Safestore Holdings (LSE:SAFE).
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The company owns and manages an expanding network of self-storage facilities, which generate recurring rental revenue every month.
This consistency is how management has been able to hike shareholder payouts for the last 15 years in a row. And anyone who invested £5,000 back in December 2010 has gone from earning a 3.9% yield to a staggering 24.4% payout!
In terms of money, that’s the equivalent of a £1,220 second income. And if the investor also decided to reinvest dividends along the way, not only would the dividends be significantly more impressive, but the initial £5,000 would have also grown to a whopping £43,914!
Still worth considering?
In recent years, Safestore’s dividend growth has slowed significantly. While its 15-year average sits around 13.3%, in 2023, 2024, and so far in 2025, this growth has collapsed to just 1%.
Does that mean this dividend growth story’s over? Not necessarily.
A big driver for self-storage is the housing market. Moving homes or committing to renovation projects often results in extra space being needed by families. But with higher interest rates, this demand has notably cooled.
However, interest rates are now steadily falling. And early signs of a cyclical rebound are starting to emerge in Safestore’s occupancy and average rental rates. Meanwhile, the group’s continued financial resilience has enabled a wider expansion into Europe even during the recent slowdown.
Of course, this is highly dependent on good execution.
Europe presents an enormous growth opportunity. But with the self-storage market significantly underdeveloped compared to the UK, unlocking this international opportunity could prove challenging. So much so that European lacklustre performance could ultimately offset a recovery in the UK.
Nevertheless, with a solid track record, prudent leadership, and substantial long-term cash flow catalysts, Safestore remains a dividend growth stock worthy of closer consideration. That’s why I’ve already added it to my income portfolio.
