The FTSE 100 currently has an average dividend yield of 3%. The idea of investing for income, especially of reinvesting dividends, is appealing. It’s a proven way to grow a portfolio, significantly, through the benefits of compounding – earning interest on top of interest. That’s why I like part of my portfolio to focus on FTSE 100 shares that produce an income far above any other investment that I could easily hold and sell.
A UK share with a yield above 6%
Legal & General (LSE: LGEN) is a very reliable FTSE 100 dividend payer. It kept paying its shareholders an income even through the pandemic when rivals cut their dividends. The dividend went from 14.35p in 2016 to 17.57p in 2019. The dividend yield is currently 6.3%.
What makes Legal & General a top FTSE 100 share for income is its strategic focus on future growth markets. It’s well positioned to support people in retirement through its annuities and other financial products. It also invests in housebuilding and other infrastructure, so can support the UK government with building infrastructure post-pandemic. It’s also well placed to benefit from increased interest in the stock market as it has a massive passive investing business.
The superb operational performance has supported slow and steady dividend growth for many years.
As always through, there are risks. In the case of Legal & General, I think in particular there’s a chance the company as an investor is reliant on the markets – both equities and bonds. A collapse in either could be damaging. The company itself notes that it holds a significant portfolio of corporate bonds to back its pension risk transfer and annuities business.
The pricing of long-term life insurance business requires the group to make assumptions about future trends in life expectancy. That creates a risk — if customers live longer than assumed in its forecasting models, it will require an increase in reserves and reduce Legal & General’s profits. It may even put pressure on the dividend.
Another FTSE 100 income share
For me, Vodafone (LSE: VOD) is another appealing FTSE 100 share for dividend income. Its dividend yield is also over 6%.
Vodafone has some potential to bounce back as Covid-19 retreats because it will earn more from roaming charges. People going on holiday could be good for profits. There’s the possibility that 5G could also boost the Vodafone share price through higher data usage and more expensive customers contracts.
The better customer retention Vodafone currently has among those customers that buy broadband, fixed line, and TV services could also help future profits. If Vodafone can improve at cross-selling and making customers more loyal, it could really help future growth.
The risk with Vodafone is that it has huge debts and is really struggling to grow. Indeed, in the last full year, revenue fell 2.6%. In the past, the emergence of 4G, access to emerging markets, and other advantages haven’t helped it perform better. So will 5G make the difference? I think it’s hard to tell right now.
Despite some risks and challenges, Legal & General and Vodafone both strike me as being the sort of FTSE 100 shares I’d add to my portfolio for income.
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Andy Ross owns shares in Legal & General. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.