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Investing in dividend stocks is a powerful and proven way to start earning a chunky second income. And doing so inside of a Stocks and Shares ISA only amplifies the benefits with no taxes to worry about, even if dividends end up reaching as high as £50,000!
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Unlocking a £50k tax-free salary
On average, UK shares offer a dividend yield of around 4%. However, by being a bit selective, it’s possible to boost that yield a little higher towards 5% without needing to take on excessive levels of risk. And at this rate, a £50,000 second income from dividends would need a £1,000,000 portfolio.
Sadly, most investors don’t have a seven-figure nest egg just sitting in the bank. Fortunately, when working on a long-term time horizon, reaching this impressive milestone is far more achievable than many would believe.
Putting aside £500 each month and reinvesting any dividends received creates a steady stream of capital to leverage the snowball effect of compounding. Let’s assume that on top of the 5% dividend yield, a portfolio also generates an extra 4% annual capital gain, in line with the market average.
This brings the total gain to 9% a year. And under these conditions, the journey to millionaire status could be completed in just over 30 years when starting from scratch. Is that a guaranteed timeline? Of course not. The stock market does have a tendency to go through crashes and corrections every once in a while. And a poorly-timed downturn could leave investors waiting longer than expected.
But even if everything does go smoothly, it’s worth remembering that inflation will chip away at the spending power of £50,000. Nevertheless, an early retirement could still be possible for those who begin their wealth-building journey sooner rather than later.
Finding 5%-yielding stocks
With UK shares performing strongly in 2025, the list of high-yielding opportunities across the FTSE 350 has shrunk compared to a few years ago. Yet there are still plenty of opportunities available to capitalise on. And one that I’ve got my eye on right now is PayPoint (LSE:PAY).
The yield’s slightly shy of the target 5%. But thanks to the highly cash-generative nature of this enterprise, shareholder payouts have been getting consistently hiked for the last four years. In other words, a 5% yield could be just around the corner.
The business provides payment processing solutions to over 67,000 small and independent retailers across the UK, as well as operating the Collect+ parcel network that many e-commerce stores leverage to keep last-mile delivery costs low. And with tools, features, and online shopping steadily driving demand, the company has seen its growth quietly expand over the last five years. And if analyst projections prove accurate, that trend’s expected to continue.
Of course, there are risks to consider. Aggressive internal investments and share buyback schemes have pushed the group’s net debt up significantly. At the same time, with its terminals already deployed across the country, there’s the risk of market saturation to consider that could undercut growth potential.
Management’s been steadily diversifying its business to unlock fresh opportunities, funded by its existing cash-generative operations. But of course, execution risk remains.
Nevertheless, PayPoint looks like a potentially interesting opportunity. And for investors seeking to earn a chunky second income, it might be a stock worthy of a closer look.
