Buying 9,346 shares of this cheap stock would give me £2,000 a year passive income

Harvey Jones can get get an eye-catching passive income thanks to this FTSE 100 stock’s ultra-high dividend yield of 8.57%

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I’m building up a portfolio of FTSE 100 stocks that will pay me a passive income to top up my pensions when I retire.

One of my favourite is insurer and fund manager Legal & General Group (LSE: LGEN), which I’ve bought on three occasions this year, in April, July and August. In total, I invested £4,000, and plan to buy more when I have the cash.

So far the share price performance has been pretty underwhelming. I’m up a meagre 0.66% on my purchases. Still, these are early days, and I’ll measure the stock’s success over years and (hopefully) decades, rather than months.

Giving it time

Also, I didn’t buy the stock expecting a sudden growth spurt. As an asset manager, Legal & General is exposed to economic and stock market sentiment, which are likely to remain troubled for some time.

I bought it because the shares were cheap, trading at less than six times earnings, and because its dividends are among the most generous on the index, now yielding 8.67%.

I already reap the benefits, having received my first dividend on 28 September. I reinvested the payout straight back into the stock, as I always do.

I received an interim dividend of 5.71p per share, which was a 4.96% increase on last year’s 5.44p. It was worth just over £104. Hardly riches, but it’s a start.

Last year, L&G also paid a final dividend of 13.93p. If it does the same again and it also rises 4.96%, I can expect to get 14.62p per share. Since I hold 1,824 shares in total, that’ll be worth around £267.

So I’ll get around £371 worth of dividends in year one, which is great but hardly life changing. If I wanted to up that to £2,000 a year, I’d need to buy a lot more shares.

Doing my sums

In 2024, the stock is forecast to pay a total dividend of 21.4p per share. Which means I’d have to hold 9,346 shares to hit my £2k dividend target. At today’s share price of 225.8p, that would cost me £21,103 (minus the £4k I’ve already invested). That’s doable but might take me a few years, as there are other shares I’d like to buy too.

While I think the dividend looks sustainable, nothing is ever guaranteed when investing. Another risk is that the stock may be a classic value trap. The share price is down 6.98% over one year and 7.7% over five years, which is disappointing. If the economy slips into recession or share prices crash, it could fall even further.

The company is making money though, posting a first-half 2023 operating profit of £941m. That was a slight fall on last year’s £958m, but still solid. The low valuation and high yield more than compensate for these concerns. At some point, I think its share price could take off too, giving me some capital growth. But mostly, I’m after the passive income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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