One of the reasons I invest in shares is because I like the passive income streams they can give me. For example, imagine I bought into insurer Legal & General (LSE: LGEN). At the moment, the Legal & General dividend yield is 7.1%. That means, if I invested £1,000 in the shares today, I would hopefully earn £71 of dividends from them in the coming year.
If I had spare money to invest right now, I would use some to buy Legal & General shares. Here is why I think it could be a good income pick for my portfolio.
Dividend source
A lot of companies pay dividends. While 7.1% is higher than many firms, there are other businesses that have even juicier yields than Legal & General. Despite that, I would be happy to include this one in a diversified portfolio.
When looking at an income share, it is not only the yield that matters. It is also the source of the dividend. Many miners have a high yield, for example. But if metal prices fall and profits collapse, those yields may tumble as dividends become unsustainable at the current level. The same is true for energy companies.
Dividends are never guaranteed at any firm, in fairness. The Legal & General dividend could end up being cut at some point too. For example, it was reduced after the financial crisis in 2008. If the recession worsens and income falls, maybe the payout will be cut again.
But overall, I think the firm has a robust business that could be a strong source of future income. That matters because a company needs to be profitable to keep paying dividends year after year.
Promising outlook
Why do I have this confidence about Legal & General as a business?
Although a recession could lead to some customers cutting back how much they spend on financial services, in the long term I expect robust customer demand in the sector. As a believer in long-term investing, I find this an attractive area to search when choosing shares to buy.
Legal & General has a strong competitive advantage in that marketplace, I reckon. Its name and umbrella logo are well-known to millions of existing and potential customers. That can help boost sales, without necessarily adding the sorts of marketing costs newer companies might need to spend.
Legal & General dividend prospects
Last year, profits after tax topped £2bn. Per share, the dividend was only 54% of basic earnings. So not only does the highly profitable business enable a chunky dividend, there is even scope for an increase.
Indeed, the company has set out plans to do that annually over the next several years.
That is only a plan, though: dividends are never guaranteed. But the business has a good track record when it comes to sharing its success with shareholders and has been a rewarding income share in recent years.
With the share price 10% cheaper today than a year ago, I would add the company to my portfolio today if I had spare cash to invest.
