A thousand pounds won’t get me what it used to. But it’s not an insignificant amount of money, especially if it’s generated passively from dividends to provide a second income.
Here, I’ll explain why Legal & General (LSE: LGEN) is my favourite high-yield FTSE 100 stock today. And why it forms the bedrock of my own passive income portfolio.
A trusted brand
Founded in 1836, L&G is one of the UK’s largest insurance and financial services firms. Its operations include life insurance, asset management, retirement solutions, and general insurance, which it provides to both individual and institutional clients. It also has a growing international presence.
First off, I like the permanent demand for these products and services. In fact, I only expect demand for them to grow in the decades ahead as the global population lives longer and pensions become increasingly important.
Also, I doubt companies and individuals are going to entrust their pensions to just anyone. They want to know they are safe and well looked after. In my eyes, then, L&G’s vast experience, expertise, and trusted reputation give it a durable competitive advantage.
The company was one of the founding constituents of the FTSE 100 when the index was first launched in 1984. Unless taken private or acquired, I expect it to remain there for many more years to come.
Challenging conditions
The share price has been on a downwards trajectory over the past couple of years. In fact, at 204p, it’s down around 20% this year alone.
Of course, it’s rare that a firm’s share price declines like this without some valid concerns. And the dark clouds swirling above the stock right now are largely due to the higher interest rate environment we’re in.
This has knocked the group’s assets under management, and there’s a risk these could fall further if the global economy worsens.
We saw evidence of these challenging conditions as the company’s operating profit fell 2% to £948m in the first half of 2023.
A grand a year in passive income
The share price decline, coupled with dividend increases, has left the stock carrying a mighty 9.5% dividend yield. For 2024, brokers have pencilled in a 21.4p per share dividend.
That translates into an eye-popping 10.4% forward yield!
This means I could invest around £9,588 in 4,700 shares today to aim for £1,000 in passive income next year. The dividend could then increase annually afterwards, which suggests this could prove to be an incredibly attractive investment.
But how can I be sure that I’ll receive that level of income?
Well, the short answer is that I can’t be. Dividends are a discretionary distribution of profits and can be cut if business deteriorates.
However, I’m optimistic here because the dividend is supported by strong cash flow and a robust balance sheet.
I’m loading up
L&G hasn’t taken the ax to its dividend since the 2007/08 financial crisis, a period when the global capitalist system itself appeared on the brink of collapse. Even then it lowered the payout rather than cancelling it!
This tremendous track record, coupled with what I see as an unjustifiably low share price, has left me desperate to buy more shares.
That 10%+ forward yield easily beats anything on offer from cash and is well above current inflation.
