My favourite way of earning a second income is to buy dividend shares. And there’s lots of them to choose from. For example, at the moment (28 November), the five highest-yielding stocks on the FTSE 100 offer an average return of 7.5%.
| Stock | Yield (%) |
|---|---|
| Legal & General | 8.7 |
| Phoenix Group Holdings (LSE:PHNX) | 7.9 |
| M&G | 7.4 |
| Mondi | 7.0 |
| Land Securities Group | 6.7 |
| Average | 7.5 |
This means a £20,000 investment divided equally among them could generate a return of £1,500 over the next 12 months.
A long term approach
But let’s assume that instead of banking this cash, it’s reinvested buying more of these shares. In this case, if the yield remained unchanged, income of £1,613 would be received in year two. Repeat this for another year and the return would rise to £1,733. You get the picture.
The act of reinvesting dividends is known as compounding and has some high-profile supporters. For example, Warren Buffett once said: “If you don’t find a way to make money while you sleep, you will work until you die.”
Returning to our example, if we continued for another 22 years, the initial lump sum of £20,000 would grow to £121,967 after a quarter of century. At this point, a 7.5% return would provide an annual second income of £9,148.
Of course, it’s wise to be a little cautious. There are no guarantees – especially over a period of 25 years – that dividends will be maintained. And inevitably, the share prices of these five will move up and down. If they go in the wrong direction then all of the benefits of holding income shares could be wiped out.
However, this example does highlight the potential benefits available from owning high-yielding shares, especially over an extended period.
Delving deeper
Looking at the five, Phoenix Group Holdings, the wealth manager, is the one that’s been around the longest. The group can trace its roots back to 1782. And for its past six financial years, it’s increased its dividend. For 2024, it was 15.4% higher than in 2019. Its interim payout for 2025 is 2.6% more than last year’s.
| Year | Dividend per share (pence) | Change (%) |
|---|---|---|
| 2019 | 46.8 | +1.7 |
| 2020 | 47.5 | +1.5 |
| 2021 | 48.9 | +3.0 |
| 2022 | 50.8 | +3.9 |
| 2023 | 52.65 | +3.7 |
| 2024 | 54.0 | +2.6 |
At 30 September, it had £98.18bn of equites, £91.57 of debt securities, and £4.48bn of investment property on its balance sheet. This means it’s vulnerable to turbulence in other markets. Falling returns are likely to put is dividend under pressure. And increased competition is another concern.
However, compared to a year earlier, the company’s half-year results for the six months ended 30 June showed a 25.3% increase in adjusted operating profit, a 9% rise in operating cash generation and a 5% boost to assets under management.
Phoenix isn’t a household name, which probably explains why from March 2026, it will be known as Standard Life, one of its more famous brands. Following a series of acquisitions as well as organic growth, the group now looks after the pensions, savings, and investments of 12m people in Europe.
Overall, I think it’s worth considering.
Final thought
As for the other four, I already own Legal & General. But I’d have to do more research before deciding whether the remaining three should be part of my ISA.
But I wouldn’t stop there. I think the UK stock market is stuffed full of impressive dividend shares offering attractive returns.
