Here’s why I’d buy Legal & General shares to bag 7.5% dividends today

Legal & General shares are picking up, as the company reaches the halfway stage in its five-year cash and dividend plan. Here’s how things look.

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Legal & General (LSE: LGEN) shares offer one of the most attractive dividends in the FTSE 100 right now, in my view. Forecasts put the insurance stock’s yield at a whopping 7.5%, with predicted cover by earnings coming in at around 1.7 times.

The depressed Legal & General share price has helped boost the dividend yield. But the share price has been picking up in the past month. So I wonder if the bargain buy that I see right now might not be with us for much longer?

If I buy for the dividends, I’d need to have confidence in these big forecast payouts. And first-half results released on 9 August do make the cash look a little closer to me.

Upbeat sentiment

Speaking of the interim figures, Mark Crouch, analyst at social investing network eToro, said: “Insurers aren’t the most glamorous or exciting of investments, but Legal & General has a lot going for it. As its half-year results show, it is profitable, growing, highly cash generative and well capitalised. On top of that, it offers one of the most generous dividend yields in the FTSE 100, making it very popular with investors who need their portfolios to generate an income“.

I find it hard to disagree with him. I’m particularly buoyed by seeing cash generation reaching £1bn. That’s a 22% year-on-year increase. And it surely bodes well for the future reliability of Legal & General’s progressive dividend stream.

My main concern is all about today’s investing sentiment. Economic conditions have resulted in many investors withdrawing funds from stock markets and looking for somewhere allegedly safer.

But saying that, Legal & General Investment Management recorded only a 2% fall in operating profit, which I think shows resilience. And total assets under management at 30 June were down only around 3% over the same time a year previously.

Dividend plan

Legal & General raised its interim dividend by 5%, to 5.44p per share. That’s fine, but it’s all about long-term targets for me.

Unlike many companies, L&G set out a five-year plan back in November 2020. Its key target was to generate between £8bn and £9bn in cash and capital, and to pay out between £5.6bn and £5.9bn in dividends.

The board wanted to grow dividends by low to mid-single digits from 2021, and to support that with earnings growing at a faster rate. So how’s it going now?

In this latest update, L&G said “We are now half-way through our ambition period and are on track to achieve or beat our cumulative cash and capital ambitions“.

Risky second half?

Things look good, but what are the risks? At the time these plans were constructed, nobody could have expected the post-Covid supply chain disaster that’s helped send inflation soaring. Few will have foreseen the escalating energy costs we now face. And surely even fewer will have predicted a war in Ukraine.

Five years can be a short time in an investor’s career. But it can be a very long time in world economics and politics. I think the second half of the plan could be a lot riskier than the first.

But progress is solid so far. And yes, I’d buy Legal & General shares for long-term dividends.

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 assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. 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.

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