A Dividend Aristocrat is a company that has paid and increased its payout to shareholders over a long period. The British market has a few dozen of these stocks, and they can be great shares to consider when starting to build an income-paying portfolio.
If I were aiming for £1,000 a year in passive income, I’d buy Dividend Aristocrat Legal & General (LSE:LGEN).
A financial services powerhouse
When it comes to dividend stocks, Legal & General ticks all the boxes for me. Established nearly 200 years ago, it specialises in pensions, asset management, and insurance. The group now has more than £1trn of assets under management. And it has a long history of generating impressive cash flows and possesses a strong balance sheet.
I want to see a company steadily increasing its earnings over many years (preferably decades) to support the dividends. And I’d prefer to see a long track record of raising its payouts. Again, ticks all round here for L&G.
Plus, the stock seems great value. It has a cheap price-to-earnings (P/E) ratio of 7.5.
A grand a year in passive income
The stock carries a dividend yield of 7.5%, which is approximately double the average of the FTSE 100. Today, one share is 253p, and the forecast total dividend for the current fiscal year is 19.4p per share. That means I’d need about 5,155 shares to generate £1,000 a year in passive income. That would cost me around £13,000.
Obviously, that’s a substantial sum of money. I may not be able to stump up that kind of cash straight away. But that doesn’t mean I couldn’t aim to gradually work my way towards that figure through regular weekly investments.
For example, if I bought 33 Legal & General shares a week, that would cost me a little over £83 (as things stand). That’s obviously much more affordable. And if did that every week for one year, I’d have 1,716 shares.
After three years, I’d have 5,155 shares, which could be paying me £1,000 in annual passive income.
Of course, the share price won’t stay static over three years. It’ll naturally fluctuate. But drip-feeding my money in every week should smooth out the ups and downs.
Plus, the forward yield now stands at a whopping 8%. While very juicy, the higher the yield goes, the more risk there could be that the dividend gets cut. Even Dividend Aristocrats could reduce their payouts!
Some considerations
Of course, I wouldn’t put all my money into just one stock. I’d aim to build a diversified portfolio over time, with different income stocks, just in case any single one stopped paying dividends.
And I’m fortunate that my brokerage account offers commission-free trading. Some platforms still charge for each transaction, which would significantly increase the costs of investing every week.
Overall, Legal & General’s excellent track record and pedigree gives me confidence this is an excellent choice for passive income. That’s why I’m a happy shareholder myself, and regularly add more of the stock to my well-diversified portfolio of income payers.
Over the long term, I expect this stock to continue rewarding shareholders with attractive levels of passive income.
