Is the FTSE 100 index of leading British companies a good place to hunt for some juicy dividend shares that can help build a second income?
It certainly can be. The index contains dozens of proven, longstanding businesses that regularly pay dividends.
Of course though, not all are equally attractive. Dividends are never guaranteed to last. It is important to consider carefully what a share’s prospects look like when deciding whether to buy it.
So how does the index’s highest-yielding share look to me?
Big dividend payer over the long term
The share in question is financial services firm Legal & General (LSE: LGEN). Its 7.7% dividend currently tops the FTSE 100’s leader board of high yields. Not only that, but the company aims to keep growing its dividend per share annually in coming years.
It has been doing that over the past few years. In fact, since a steep cut during the 2008 financial crisis, Legal & General has grown its dividend per share every year apart from one during the pandemic when it held it where it had been the previous year.
Clearly, management understands the importance of the dividend to the investment case. Still, that is no guarantee it will be maintained. Annual growth has slowed from 5% to 2% in recent years.
At the current share price, 1,000 shares would cost under £3,000 and ought to generate around £218 annually in dividends even before considering any possible increases.
Longstanding business with well-known brand
Dividends are all well and good, but the savvy investor knows better than to look just at the current yield a share offers.
What matters more from a long-term investing perspective is how able and willing the business looks to keep the payouts flowing. On one hand, L&G has lots going for it here. It operates in a segment of the financial services market that is huge and benefits from substantial long-term demand.
Its business has proven its cash generation potential over many years and I expect that to continue to be the case, thanks to a large customer base, strong brand and reputation stretching back to prior centuries.
However, there are risks too. Current economic uncertainty could lead policyholders to pull funds, hurting earnings. It is no coincidence that the last dividend cut was during a financial crisis.
On top of that, the sale this year of a large US business means that the company’s revenues could shrink. One upside though, was that the sale provided Legal & General with a chunky sum of money.
An income not growth focus
That sale underlines that the long-term story here is one of income rather than growth.
Indeed, the Legal & General share price has moved up just 4% in five years, versus a 50% gain in the wider FTSE 100 index during that period.
From a dividend perspective though, I think the share is worth considering for someone who seeks to build a second income.
Should you invest £5,000 in Legal & General Group Plc right now?
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Christopher Ruane does not hold any positions in the companies mentioned.
