Buying shares for their dividend potential can be a good way to generate passive income. One FTSE 100 share I have been eyeing for my portfolio is financial services provider Legal & General (LSE: LGEN). I see long-term growth prospects for the firm, but what most attracts me is the L&G dividend.
Here are three reasons why.
Likelihood of growth
No dividend is ever guaranteed. Even a well-run company can experience unforeseen challenges that lead to a falling dividend.
However, I am optimistic about the chances of growth for the Legal & General dividend. The company has set out a medium-term capital return policy that foresees mid-single digits percentage dividend growth this year, as has been the case over the past several years.
With annual profits of several billions of pounds at the moment, Legal & General is a business in robust health. That ought to be able to help it increase its dividend.
Still, there is a risk of some change in business circumstances hurting profitability, leading the business to freeze its dividend (as it did during the pandemic) or cut it (as happened during the 2008 financial crisis).
Business prospects
At the heart of any investment is a belief in how a business is likely to perform in future. After all, no matter how attractive a dividend may be today, if a company’s business is likely to deteriorate in future, the payout could turn out to be unsustainable.
This is one way in which the Legal & General dividend appeals to me. The long-established firm has a well-known brand and umbrella logo that help it attract and retain clients. It also has a large customer base.
There can be short-term ebbs and flows when it comes to demand for financial services. But as a long-term investor, I like the area in which it operates. Services such as pensions and investment management have large resilient markets I expect to remain.
Just because a market is big does not always mean that it will be highly profitable. But when it comes to financial services, large sums of money are often involved over the long run. That means that even small commissions and yields can add up to large profits.
Legal & General strikes me as a well-positioned business within an industry with enduring profit prospects. That should be good for its business performance. That matters when it comes to setting the dividend. Last year, this was covered around twice over by earnings.
Attractive yield
At the moment, the Legal & General dividend yield is around 8.4%. Even without factoring in any possible future growth in the payout, that means that I should be able to receive sizeable future income by buying the shares today.
In around 13 years, I ought to have received back the same amount of money I invested as dividends – and still own the shares.
If I had spare money to invest today, I would happily add Legal & General to my portfolio.
