Owning shares is one of my favourite passive income ideas. One popular income share (I have owned in the past) is Legal & General (LSE: LGEN). Today brought good news about the L&G dividend, with the insurer announcing another increase in its annual payout.
I reckon putting £1,000 into the shares today could earn me £1,060 in dividend income in around 11 years. If that happened, not only would I have earned back almost what I spent, I would still own the shares and could hopefully keep on earning dividends from them.
Legal & General dividend increase
This morning the firm published its annual results. Profit after tax grew 12% compared to the prior year – and so did earnings per share.
For a company that has been around since Queen Victoria was in her teens, that is a strong level of growth. I put that down to some of the strengths I think could keep powering the company into the future.
It operates in an area I expect to see strong customer demand. A unique, well-known brand and long experience can help it benefit from such demand.
That good news on the dividend front means the full year payout rose 5% year-on-year to 19.4p per share, meaning the current Legal & General dividend yield is 7.5%.
Targeting dividend growth
That was good news but not unexpected. The dividend remains comfortably covered. Indeed, with earnings per share growing faster than the shareholder payout, the dividend cost now represents just 50.5% of earnings.
The company reiterated in its results that “our confidence in our dividend paying capacity is underpinned by (Legal & General’s) strong balance sheet”.
A rise is also in line with the insurer’s dividend policy. It aims to grow dividends annually by 5% for the next couple of years.
Building passive income streams
Dividends are never guaranteed however. Legal & General, like all businesses, faces risks that could lead to it cutting or cancelling its dividend. We have already seen rival Direct Line do that this year. For example, bad weather could push up claims settlement costs and eat into profitability.
But I am confident in the long-term appeal of the Legal & General business model. If I put £1,000 into its shares today and the dividend continues to grow by 5% annually, then after 11 years my dividends would add up to around £1,060.
In other words, I would have earned back more than I paid for the shares – and still own them.
Why I’d buy
I do see the Legal & General dividend as the main attraction of the shares. Recent share price growth has been small. While the shares are 11% higher than a year ago, on a five-year timeframe the Legal & General share price has only grown 2%.
In a way though, I see that as an opportunity. With improving business performance, the shares now sell on a price-to-earnings ratio of less than 7. That looks cheap to me for a blue-chip firm of this quality, with an attractive dividend to boot. So the share price could move upwards in coming years if business performance continues to improve.
If I had spare cash to invest today, I would add the shares to my income portfolio.
