The FTSE 100 is full of high-quality income stocks. But when looking at dividend yields, there’s one that stands head and shoulders above all others.
Today (26 June), an investor could buy 173 shares in Legal & General (LSE:LGEN) for £498.24. With a yield of 7.7%, this could unlock a passive income of £38.46 over the next 12 months.
Admittedly, this isn’t going to change someone’s life, but with a small, regular investment and a bit of patience, it well might. Let me explain.
What do the numbers look like?
As tempting as it might be to spend the £38.46 on something unnecessary, I think it would be better to reinvest it buying more Legal & General shares. In doing so, it’s possible to benefit from compounding, once described as ‘humankind’s greatest invention’.
To illustrate why it gets such a good press, here’s how £500 would grow over different periods, assuming an annual return of 7.7%:
- Five years – £725
- 10 years – £1,050
- 15 years – £1,521
- 20 years – £2,204
- 25 years – £3,194
- 30 years – £4,629
- 35 years – £6,707
- 40 years – £9,718
After four decades, it would be worth nearly £10,000 and generating dividends of £748 a year. As they say, mighty oaks from little acorns grow.
But as impressive as this might be, once again it’s not transformational. However, if more than £500 was invested, I think it could be. For example, a lump sum of £10,000 would be worth £194,370 after 40 years. That’s more like it.
Another strategy
Unfortunately, not everyone has this kind of money lying around. Instead, a small monthly investment is likely to be more achievable.
Indeed, supplementing an up-front £500 with a monthly investment of £100, would grow (at 7.7%) as follows:
- 25 years – £87,169
- 30 years – £133,309
- 35 years – £200,168
- 40 years – £297,048
Using the largest of these numbers, a portfolio of dividend shares paying 7.7% would produce an amazing income of £22,873 each year. That’s a brilliant return from doing nothing, other than buying a few shares each year.
However, dividends cannot be guaranteed. If Legal & General’s earnings were to suffer due to increased competition, or its huge investment portfolio was badly affected by a market downturn — brought on by a global economic slowdown — then its payout is likely to be cut.
Either of these things can’t be ruled out.
My view
However, I remain positive about the pension and savings group’s prospects. Personally, I believe there are many reasons why it could retain its position as the highest-yielding FTSE 100 stock for the foreseeable future.
In 2025, it reported a 9% rise in core earnings per share. Encouragingly, the group says it’s on track to deliver a 6%-9% increase in 2026. It’s also pledged to increase its dividend by 2%.
The group’s actively targeting £17bn of pension funds that it wants to manage. It’s also benefitting from renewed enthusiasm for annuities, brought on by the higher interest rate environment in which we find ourselves.
Importantly, it maintains a strong balance sheet, holding more than twice the level of reserves that the industry regulator insists companies in the sector should have.
Overall, I think Legal & General’s an excellent dividend share for investors to consider.
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James Beard owns shares in Legal & General plc.
