I tend to avoid stocks with sky-high dividend yields when hunting for passive income. It’s usually an indication that something isn’t right.
Perhaps a company is trading poorly and the outlook is bleak. This may lead the share price to drop, pushing the yield up. If the latter looks too good to be true, it usually is.
Every so often however, I’m willing to make an exception.
At just over 9%, at the time of writing, financial services giant Legal & General (LSE: LGEN) currently boasts one of the highest dividend yields in the FTSE 100. In fact, my research suggests only four top-tier companies pay more.
Why so high? Well, the blue-chip’s share price has indeed been on the slide. Year-to-date, it’s down by 10%. That’s not disastrous in the grand scheme of things, but I suspect those already invested aren’t exactly happy about it.
As far as I can tell however, this drop has little to do with L&G and more to do with the cyclical nature of the sector it operates in.
You probably don’t need me to tell you that (most) economies around the world are struggling right now. As a result, many UK stocks, particularly those with any association with finance, aren’t in demand. Banks, asset managers, insurers — all of them are on the naughty step.
But that’s potentially great news for long-term focused dividend investors.
There are a few things I particularly like about Legal & General from a passive income perspective. For one, it’s got a superb record of increasing the amount it pays out to holders on an annual basis. This year’s no exception with a 5% uplift expected by analysts.
It also boasts attractive growth prospects. As populations age, more of us will be looking to get our retirement plans in order. Being the UK market leader in this space, L&G stands to benefit. That should bode well for the dividend stream going forward.
A word of warning
This isn’t to say that L&G is a ‘no-brainer’ buy. No income from the stock market is ever completely guaranteed. Indeed, there’s a chance the company may need to dip into its reserves to completely cover payouts before long if this bout of bearishness in the global economy continues.
As always, diversifying my portfolio and holding a group of dividend-paying stocks rather than just one or two feels sensible.
But would L&G make the cut? Based on my bullish points above, I think it would.
So let’s do the sums.
£100 in monthly passive income
To generate the equivalent of £100 in monthly passive income now, I’d need to invest roughly £13,500 for 6,000 shares today. That’s clearly not practical for most people (including me).
If I put £100 in the stock every month for eight years and reinvested all the income I received however, I’d be close to that amount. I could then sit back and actually enjoy those dividends.
Granted, this does assume the share price and yield stay where they are. In reality, both will move around. That said, this does give some indication of what I could receive if I built up a position over time.
As always, the best decision anyone can make when it comes to investing is just to get started.