Legal & General shares now yield 8% and look too cheap to ignore

Legal & General shares haven’t delivered much growth for years, but just look at that dividend.

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In March, I declared my love for Legal & General Group (LSE: LGEN) shares. I said if I could only buy one dividend income stock on the FTSE 100, it would be this one.

Since then, its stock has fallen by 10%. Yet that reversal hasn’t tempered my enthusiasm, quite the reverse. I think now is an even better time to buy the £14.25bn insurer and asset manager. It’s 10% cheaper, after all.

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There has been no bad news coming out of the company since I last wrote about it. It has simply been caught up in the wider stock market sell-off.

Naturally, the looming recession will hurt Legal & General. Both new and existing customers may have more pressing priorities than funding regular monthly pension, investment, and protection plan payments. 

Many may be forced to cash in investment policies, to put food on the table. Asset managers usually suffer outflows in a downturn. With inflation expected to hit double digits, the squeeze will only intensify.

Yet Legal & General remains a broadly defensive stock. Its annuities operation should benefit from rising interest rates, as this will boost rates and customer demand. Equity release sales may also grow, as pensioners struggle to live on their retirement savings. There will be positives as well as negatives, and I wouldn’t say that about every company.

The insurance sector may also be re-energised by government plans to scrap EU Solvency II regulations, as part of its post-Brexit reforms. The aim is to cut red tape and encourage insurers to invest in long-term infrastructure such as offshore wind farms. 

Bank of England Governor Andrew Bailey has called Solvency II “cumbersome”, and so far, the market response has been positive. Reform may encourage insurers to take more risks, by cutting capital reserve demands, which could make them more exciting to invest in. 

This FTSE 100 stock fights inflation

The main reason to invest in Legal & General is still the dividend (and probably always will be). It is now forecast to yield a thumping 7.9%, covered 1.7 times by earnings. That makes it a tremendous inflation hedge. While no dividend is completely safe, this is more solid than most.

Management has a good track record of hiking shareholder payouts. It did freeze the dividend at 17.57p per share in 2020, but that was during the pandemic. At least it didn’t drop its payout, in contrast to FTSE 100-listed rivals Aviva and RSA.

I think now looks like a great time to buy Legal & General, which is valued at a lowly 7.4 times earnings. Old warhorses like this one should continue to prove their worth, as recession fears grow.

I’m not expecting Legal & General shares to suddenly go on a gallop. They’ve gone nowhere slowly for five years. When the recovery finally comes, short-term investors are likely to race back to riskier stocks, but that’s fine by me.

I’ll keep my reinvesting my dividends, year after year after year. There aren’t many ways to get a rising income of almost 8% today. I like this one.

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Harvey Jones doesn't hold any of the shares mentioned in this article. 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.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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