Is 2026 a brilliant year to build a second income?
Investing in a portfolio of FTSE 100 shares is a great way to target a second income in retirement. Thatâs because they pay some of the most generous dividends in the world, and thereâs something else too.
UK blue-chips are firmly back in fashion, with the index posting its fifth-best year ever in 2025. So investors get growth on top of the regular payouts most big UK companies make to reward shareholders for their loyalty.
I can see another reason why dividend shares are worth considering right now. Slowly but steadily, interest rates are falling. In fact, the Bank of England has cut base rate six times since August 2024, to todayâs level of 3.75%.
Dividends and growth
Some analysts think interest rates could fall to 3% this year, as inflation eases and the economy idles. If that happens, returns on risk-free asset classes such as cash and bonds will continue to slide.
That wonât be an issue for dividend stocks. In fact, lower interest rates can boost company profits, allowing boards to divvy up more cash among investors. Most firms aim to increase dividends every year, giving shareholders a passive income that helps keep pace with inflation.
FTSE 100 insurer and asset manager Legal & General Group (LSE: LGEN) currently offers the highest yield on the entire index, at a staggering 8.2%. Thatâs roughly double what the best-buy savings accounts pay today. Better still, the yield is forecast to hit 8.48% in 2026.
The Legal & General share price trailed the FTSE 100 last year though, growing a modest 13.8%. However, throw in that yield and the total return is 22%, which comfortably beats cash. I also think its shares have scope to catch up in 2026.
Shares like this are far more volatile than cash. Capital is at risk. Investors should never buy stocks with less than a five-year view, but the real benefits come over 10, 20 or even 30 years, as share price growth and dividends have time to compound and grow. Short-term volatility is the price investors pay for the superior long-term returns from equities.
I hold Legal & General myself. It isnât perfect. Its earnings per share (EPS) fell for three years in a row, which weighed on the share price. That picture is improving though. The board forecasts that EPS will grow between 6% and 9% this year.
Shares with potential
Legal & General operates in a fiercely competitive market. New growth areas such as company pension risk transfers offer huge potential, but rivals are chasing the same opportunities.
Much also depends on the wider market. A global crash would hit UK shares across the board, including Legal & General, which has £1.2trn of assets under management.
Thatâs why investors should aim to build a balanced portfolio of at least a dozen stocks, so that if some disappoint, others can compensate. And hold for the long term.
Thereâs no guarantee the FTSE 100 will repeat last yearâs performance, but it has momentum and UK dividend stocks are attracting overseas interest from investors worried about stretched US tech stock valuations.
Personally, I always think itâs a good time to buy UK income stocks. The sooner investors start earning and reinvesting dividends, the longer their money has to compound and grow into real wealth. This one day can be drawn as a second income in retirement.
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Harvey Jones has positions in Legal & General Group Plc. 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.
