£5,000 in savings? Aim to turn that into a £500 extra income with UK stocks
Having some extra income rolling in passively can be exceptionally helpful in 2025, especially with inflation driving up the cost of living. Even having as little as an extra £500 a year can alleviate some of the pressure. And by leveraging dividend stocks, this goal can be reached relatively quickly by those with a solid £5,000 lump sum saved up.
Hereâs how.
Investing in dividend stocks
On average, most UK shares offer a yield of around 4%. However, there are a few exceptions, some even venturing into double-digit territory. And if the target’s £500, then with a £5,000 investment, finding a 10% stock seems to be the answer.
Sadly, in practice, this isnât very realistic. Itâs true that the London Stock Exchange is home to several 10%-yielding dividend shares, but in almost all cases, it comes with a very high risk of a future payout cut, leaving investors sorely disappointed.
Instead, a more successful strategy is to focus on the dividend stocks that may not necessarily have the highest yields right now, but are generating enough cash flow to grow their dividends over time. These are a bit trickier to find, but just like high-yield shares, the UK stock market has a diverse selection of these types of businesses.
Dividend growth opportunities
Looking at the FTSE 100, there are currently 24 stocks which have increased their shareholder payouts by a minimum average of 10% a year. And among these, Land Securities Group (LSE:LAND), also known as Landsec, stands out.
Thatâs because over the last five years, the real estate mogul has increased its dividends each year by an annualised compounded rate of 11.7%. And at a yield of 6.7%, if it continues its current pace, that payout could grow beyond 10% before the end of 2029.
Not only does this secure some extra income, but it also beats inflation, allowing everyday investors to increase their wealth.
So is this a no-brainer?
Bull vs bear
Landsec owns and leases a diverse portfolio of properties, using the rent generated to expand and reward shareholders. Historically, its assets have been focused on prime retail and office space. But with the rise of remote working, management’s moving away from the latter.
This transition, combined with higher interest rates, has put a damper on growth in 2025, with underlying earnings for its 2026 fiscal year (ending in March) on track to be a sluggish 2% to 4%. Thatâs obviously not great in terms of supporting its double-digit dividend hiking momentum.
However, as the Bank of England cuts rates, the portfolio’s restructured, and debt servicing costs fall, earnings growth is expected to re-accelerate. In fact, management believes profit expansion could reach as high as 20% by its 2030 fiscal year.
By concentrating more heavily on retail, it does make the business more sensitive to consumer spending cycles. And with tax hikes expected in the upcoming Autumn Budget, this could create some frustrating near-term headwinds.
However, with the dividend coverage ratio at around 1.25, Landsec has some wiggle room to tackle these short-term challenges.
Thereâs no guarantee that the groupâs yield will reach 10% in the expected timeline. So investors may end up with less passive income than expected. But given managementâs growth projections, it seems wise to dig a little deeper.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Land Securities Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
