I’m an investor who enjoys making passive income. Therefore, when I was looking at stocks that offer a dividend, Legal & General (LSE: LGEN) shares really caught my eye.
Background
Legal & General is a financial services and asset management company that offers a diverse range of services. Investment management, life assurance, lifetime mortgages, and pensions are some of its offerings.
Over the last year, Legal & General shares have fallen by almost 17%. This is a massive underperformance relative to the rest of the FTSE 100, which has grown over 2% in the same period.
In fact, one of my concerns with investing in Legal & General shares is the poor share price performance.
However, I believe that although not great for share price appreciation, Legal & General shares still offer an attractive path to generating a second income, which makes up for it.
Great dividend yield
With a dividend yield of 9.5%, there are few companies that can match the dividend of this one. In fact, out of all the companies on the FTSE 100, there are only four others with a higher yield.
The wider FTSE 100 yield is also currently 3.8%. Legal & General’s is much higher than this.
Therefore, I could collect £1,000 in annual passive income by buying 5,091 shares. This would cost me £10,874.38, with each share currently trading at £2.14 (keeping in mind that dividends are not guaranteed, of course).
Financial services risk
Due to Legal & General operating in the financial sector, which has been experiencing lots of volatility recently, there’s a risk that profits could fall. This may result in the company not being able to pay its dividend.
However, I don’t believe that this is too much of an issue, as the company’s dividend cover is 1.9. The dividend cover tells us how many times a company can pay its dividend with its earnings.
This tells me that Legal & General has more than enough cash to cover its payout. Therefore, while it’s possible it can reduce or stop its dividend, I don’t believe it’s probable.
Undervalued shares
The dividend isn’t the only thing I like about Legal & General shares. With a price-to-earnings (P/E) ratio of 6.6, it looks way too cheap to ignore.
It’s cheaper than the FTSE 100 as a whole, which has a P/E ratio of 11.3.
Now what?
Legal & General shares haven’t been performing well recently. They also carry risks related to the firm’s exposure to the financial sector. If volatility continues to affect the market, it could lead to lower earnings for the business. This may call into question its ability to pay dividends going forward.
However, I don’t believe that this scenario is likely for the dividend cover reason mentioned above. Plus, I feel its dividend yield is too high to ignore. It also trades at an attractive valuation.
Therefore, if I had the spare cash to do so, I’d buy the shares today.
