With the right income stocks, investors can instantly start earning money while being fast asleep. And for those with a substantial £100,000 in cash savings, investing this money into a diversified portfolio of 5%-yielding dividend shares can immediately unlock a £5,000 passive income overnight in 2026.
Yet even modest investors can enjoy similarly-sized payouts over the long run.
Using dividends to earn a second income
Let’s say someone has a more modest £500 to spare each month for investments. How long will it take to transform this capital into a £5,000 second income stream?
By drip feeding £500 into a low-cost FTSE 100 tracker fund, investors can expect to earn close to around 8% a year over the long run. And at this rate of return, a £100,000 nest egg could be built in roughly 11 years. At this point, a portfolio could be reallocated to high-quality, 5%-yielding income stocks to enjoy a £5,000 passive income stream.
Of course, stock-picking’s far from an easy task. Even when choosing between typically more mature dividend-paying shares, investing in the wrong companies could actually destroy wealth rather than create it.
So what do investors need to look out for?
Inspecting 5% yields
When yields start stretching beyond the stock market’s typical 4% average, it tends to be a warning of increased risk. The task for stock pickers is to determine whether the risk’s worth the potential reward.
Looking across the FTSE 100 today, one income stock that stands out is Hikma Pharmaceuticals (LSE:HIK). Despite having a superb track record of hiking shareholder payouts every year for the last 14 years, the recent tumble in its share price means the yield is now at its highest since the group’s IPO two decades ago.
The story starts back in November, when the firm announced a one-year delay for its new manufacturing plant in Bedford, Ohio. Given that this facility served as a crucial capacity driver for its high-growth Injectables division, performance concerns started creeping in.
Skip ahead to last month, and those concerns were realised. While Hikma’s full-year results for 2025 largely met expectations, weaker guidance, including the complete withdrawal of the previous medium-term target, understandably spooked the market. That resulted in a painful sell-off that pushed the yield to its current 5.2% level.
A buying opportunity in disguise?
Despite the short-term challenges, the long-term outlook for Hikma continues to look rather promising. Its vast pipeline of generics perfectly positions the business to capitalise on the incoming patent cliff of the wider pharmaceutical sector.
At the same time, the recent pressure on profit margins is expected to steadily reverse once its new plant comes online in 2027. In the meantime, the group’s $185m of shareholder payouts remains comfortably covered by $741m of operating profits.
Of course, that doesn’t guarantee Hikma to be a winning investment. Changes in US drug price regulation could throw a disruptive spanner in the works. And any further delays to its Bedford facility could see margin pressures dragged on for longer that could limit dividend growth moving forward.
Nevertheless, with investors punishing Hikma shares quite brutally, this stock now looks like an interesting potential income opportunity, despite the risks.
