Let’s say I want to apply dividend shares to turn £20,000 of savings into a second year’s income of £5,000 or more. Such a goal would require a reliable return of 25% year after year.

Among thousands of shares around the world London Stock Exchangeno one pays a dividend at a rate close to this value. I should just pack my things and go home, right? Or maybe I should?

Snowball effect

Although it is true that the highest dividends in the whole world FTSE100 AND FTSE250 to pay up to 13% or more – which is scarce for any stock to pay more than 9% for long – is to turn a blind eye to the benefits of excellent stock selection.

The best dividend stocks don’t just pay out the same percentage of change year after year. Payouts slowly escalate, creating a powerful snowball effect. There are dozens of companies that have been generating higher profits every year for a quarter of a century!

This escalate in payments over time causes the effects of compound interest to become larger and larger. And we can combine dividend increases with reinvesting the amounts received to further multiply the effects.

A stock generating a dividend yield of 8% per year with an annual growth rate of 5% is more than enough to achieve impressive amounts. What does it look like in practice?

Over a 10-year period, the effective rate of return on the original package is 28.78%. This would mean an upfront payment of £20,000 would pay back around £5,755 in the tenth year.

Strategy

This strategy is based on finding the right company to invest in, which is why I’m always on the lookout for the best dividend stocks. I would say looking at the immense payers listed in the FTSE 100 at the moment Legal and general information (LSE: LGEN) could come true.

This is a company with a well-covered dividend that has remained in the 8-9% range for years. While dividends are never guaranteed, current projections do not indicate an immediate threat to future payments.

Most importantly, the company has a solid track record of growing dividends. The average 10-year growth rate is 6.17%. Remember that it is the escalate in dividends combined with reinvestment that will really escalate future returns.

As an insurance and investment group, Legal & General may face tough economic conditions. For example, fluctuations caused by the pandemic did not result in a dividend escalate in 2020. The Covid threat was only short-lived for FTSE 100 shares, but we can never rule out that an even bigger crisis is lurking.

Has everything been said? I think Legal & General fits the mold of a world-class dividend stock. I’d say it’s worth considering for a portfolio focused on a immense second income.