As their name suggests, income shares are good for those wanting to supplement their salaries or pensions. But they can also be used to build a chunky nest egg to be enjoyed later in life.
Instead of using the dividends to spend on a few treats, I reckon it’s possible, by reinvesting them, to create a valuable portfolio of stocks and shares, quicker than you might think. Let me explain.
The three most generous…
The top three dividend payers on the FTSE 100 – Legal & General (LSE:LGEN), Standard Life, and LondonMetric Property — are currently (6 June) yielding 8.1%, 7.4%, and 6.8%, respectively.
Using the average of these (7.4%), it means a £20,000 investment spread evenly across all three could generate £1,480 of dividends within 12 months. If these were reinvested, income of £1,590 could be produced in the second year. Continue this process for a third year and dividends of £1,707 might be generated. Doing this for 25 years could result in a portfolio of £119,162. That’s nearly six times more than the initial sum invested.
Moreover, supplement this with a small monthly investment and the end position would be even better.
It’s never too late
Even those who invest for a shorter time frame are likely to see some healthy gains. A sum of £20,000 growing at 7.4% annually would be worth £28,579 after five years. After a decade, £40,839.
Of course, there can never be any guarantees when it comes to shareholder returns. If a company’s earnings come under pressure then dividends are usually one of the first casualties. And typically, whenever a payout is cut, it often takes several years before it’s restored to previous levels. Also, my example assumes share prices don’t change, which is not realistic.
However, these figures illustrate the potential benefits of reinvesting dividends and the miracle of compounding.
Indeed, I have Legal & General share in my own portfolio.
Why?
It’s currently the FTSE 100’s highest-yielding share and it has a good track record of increasing its payout. It was last cut during the 2008/09 global financial crisis and was kept unchanged for one year during the pandemic.
This is a reminder that the pension and savings group’s earnings are vulnerable to economic uncertainty. With £533bn of bonds, equities, and commercial property on its balance sheet, the group relies on these to give it the income needed to meet its obligations to pensioners and savers. Its profit could also be impacted by increased competition, particularly from a low-cost new entrant.
However, at the moment, the group’s financial performance appears to be going in the right direction.
In 2025, it reported a 9% year-on-year increase in core earnings per share. And as an indicator of its balance sheet strength, the group maintains over twice the level of reserves that it’s required to.
It’s also winning lots of new business, particularly in the pensions risk transfer market. Annuities are also doing well at the moment due to higher interest rates. This gives the group the confidence to pledge to increase its dividend by 2% a year in 2026 and 2027. It’s also started a £1.2bn share buyback programme.
For these reasons, those interested in high-yielding shares as a means of building wealth could consider including Legal & General in their own portfolios.
Should you invest £5,000 in Legal & General Group Plc right now?
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James Beard owns shares in Legal & General plc and Standard Life plc.
