With an average dividend payout over double the US S&P 500, the FTSE 100 is a goldmine for passive income stocks. One of the highest yields right now comes from Legal & General (LSE: LGEN) stock. Is it the best stock I could choose for passive income?
Bumper payout
At its current share price, Legal & General offers an 8.42% annual yield to shareholders. That’s a bumper payout, but it’s only the seventh-highest on the FTSE 100.
The thing is, dividends change constantly. Companies cut or increase their payouts, and a change in share price affects what I get back as a percentage. So the highest dividend is rarely the best buy for passive income.
Take housebuilder Persimmon, for instance. Last year, the firm was paying out 18% at one point. That figure has come down drastically since then as headwinds of high-interest rates and the cost-of-living crisis mean fewer people are buying homes.
Is 8%+ typical?
So, to truly answer which FTSE 100 stock is the best passive income buy, I’m going to look at two things.
First, the history of the firm. While Legal & General’s current dividend is over 8%, it looks like yields of between 5% and 8% are more typical for this stock. This is still excellent. Compare it to the FTSE 100 average of 3.7%.
| 2022 | 2021 | 2020 | 2019 | 2018 | 2017 | |
| Annual yield | 7.9% | 6.2% | 6.6% | 5.8% | 7.1% | 5.6% |
And while dividends are key for passive income, I might see share price returns too and total returns are important. Over the last 10 years, I would have received an annualised 8.4% return from Legal & General stock.
The second point to look at is the core business. Legal & General makes money from financial services like pensions, annuities or life insurance. These are defensive products, offering a steady income rather than boom and bust years. That’s better for a reliable dividend payment.
Recent growth has been impressive too. Operating income has grown steadily over the last decade from £1.3bn to £2.8bn with increasing margins. This tells me the business is in the right hands. I see good management as key to keeping up good performance.
In terms of risks, I’m not overly keen on investing in the finance sector. Its massive balance sheets are hard to analyse (Legal & General manages over £1trn in assets) and the sector has had crises before. The firm cut its dividends in 2008 and 2009, for example.
Is it the best?
With that said, is Legal & General the best FTSE 100 passive income stock? I’d say the evidence puts it in the frame, and I don’t see any other stock beating it right now.
I’m happy to hold the shares that I own already and may increase my position in the near future.
