The need to earn a second income is rising. With inflation sending the cost of living through the roof in recent years, having a second flow of money pouring into a bank account each month can make a world of difference.

And by making some smart investment decisions, it’s possible to achieve a pretty chunky additional income almost entirely passively. So with that in mind, let’s explore how an investor can aim to earn an extra £50k each year from the stock market.

Earning by investing

Looking at the FTSE 100, UK shares have historically delivered a 4% return from dividends, with a further 4% from capital gains, or 8% in total. While building a portfolio, dividends can be reinvested to accelerate the wealth-building process. But eventually, investors can choose to keep this money to create a passive second income stream.

If the goal is to earn an extra £50k a year, a 4% dividend yield’s going to require a portfolio worth £1.25m! That’s obviously not pocket change. But reaching this level of wealth isn’t as impossible as it might seem.

By being more selective and picking individual businesses, it’s possible to seek higher returns as well as higher dividend yields. In fact, even after delivering solid gains in 2024, there are plenty of under-appreciated British stocks offering ample growth and income potential.

As such, building a 5%-yielding portfolio in 2025 without taking on enormous risk isn’t too challenging. And it also shifts the goalposts to unlocking a £50k second income from £1.25m to £1m. And if the portfolio’s able to generate a 10% total return, investing just £500 each month at this rate would reach this target in just shy of 30 years.

Opportunities in 2025

Earning market-beating returns is simple enough on paper. But in practice, it can get quite tricky. And if an investor makes the wrong decisions, a portfolio can backfire, destroying wealth instead of creating it.

With that in mind, let’s take a look at a popular income pick among British investors, British American Tobacco (LSE:BATS). Some investors may have some understandable ESG-related concerns about investing in this enterprise. However, the tobacco titan currently offers an impressive 7.5% yield, even after rising more than 35% over the last 12 months.

Having customers hooked on a product paves the way for impressive pricing power. As such, falling tobacco volumes have been offset through price hikes, enabling the company to continue raising dividends for decades. And even in the last five years, British American Tobacco’s returned £28bn to shareholders either through dividends or buybacks.

The firm certainly sounds like a promising investment candidate. But like every business, it has its weak spots. Price hikes can only grow the revenue stream so much. And as smoking becomes increasingly expensive, paired with greater health concerns, tobacco volumes are expected to steadily shrink almost every year.

Management’s fully aware of this threat and has been aggressively investing in alternative smokeless products such as vapes. These now represent 17.5% of the group’s revenue stream, but with growth seemingly slowing, likely due to tough competition, British American Tobacco’s impressive dividend track record may be coming to an end.

Personally, I think investors need to consider looking elsewhere for market-beating, income-generating opportunities.