Wouldn’t it be great to have a Self-Invested Personal Pension (SIPP) worth £1m?
Well, if someone started with savings of £20,000, received dividends each year of 8.4%, reinvested all income generated, and kept going for 49 years, they would get there.
Alternatively, a lump sum of £10,000, topped-up by an annual contribution of £2,000, would – with a yield of 8.4% — get to seven figures, six years earlier.
I could list many other scenarios that would achieve the same end goal. But the general point I’m trying to make is that it’s possible to create a large pension pot by investing in high-yielding shares over an extended period.
Is this realistic?
In my two examples, I assumed an annual return of 8.4%. This is the current (30 May) average of the five highest-yielding stocks on the FTSE 100.
| Stock | Yield (%) |
|---|---|
| M&G | 9.1 |
| Legal & General | 8.8 |
| Phoenix Group Holdings | 8.5 |
| Taylor Wimpey | 8.0 |
| British American Tobacco | 7.4 |
| Average | 8.4 |
Experienced investors will know that these types of stock should be treated with caution. A high yield might be a temporary phenomenon caused by a falling share price. When a company’s earnings come under pressure, its stock market valuation might fall quickly. But there’s often a delay before its dividend is cut.
However, despite this ‘health warning’, these top five Footsie yielders have a good track record in making generous returns to shareholders.
For example, Phoenix Group has increased its dividend every year since 2019. In cash terms, it’s now 17.4% higher than five years ago.
Taylor Wimpey reduced its payout during the pandemic but it’s been reasonably consistent since – 8.58p (2021), 9.4p (2022), 9.58p (2023), and 9.46p (2024).
M&G has a relatively short history as a standalone company – it was demerged from Prudential in 2019. However, each year, it’s increased its payout.
British American Tobacco last cut its payment in 1999.
My favourite
Of the five, there’s one that I have in my portfolio. Legal & General (LSE:LGEN), the pension and savings group, is popular with income investors like me.
During the pandemic, it kept its dividend unchanged for one year. If it wasn’t for this, it would be able to claim that it’s increased its payout every year since the global financial crisis of 2008/09. For 2025, it’s promised a 5% increase. A 2% rise has been pencilled in for 2026/27.
The group’s Institutional Retirement division is doing particularly well. It’s currently working on £34bn of new deals. An ageing population clearly helps long-term earnings. But much of the anticipated growth’s expected to come from the acquisition of third-party pension schemes.
However, it operates in an increasingly competitive industry, which could put pressure on its earnings. Also, its share price performance has been disappointing in recent years.
But the principal reason why I bought the stock is because of its above-average dividend, which appears to be secure for now.
That’s because, in my opinion, the group remains financially robust — it has over twice the level of reserves that the regulator requires it to have.
And I’m not alone in thinking the group has strong prospects. Of the 15 brokers covering the stock, only one is recommending its clients to sell. The consensus is for earnings to grow by an average of 11% a year up until 2027. The should provide plenty of headroom to cover the pledges made to increase the group’s dividend.
For these reasons, I think it’s a stock that income investors could consider adding to their portfolios.
