As an income investor, I’m always on the hunt for shares that provide me with the opportunity to make a good passive income on the side.
Legal & General (LSE:LGEN) shares are currently sporting a sky-high dividend yield of 9.2%. So, let’s take a deeper look to see if this stock is worth me investing in.
Firstly, its shares have suffered an 11% decline this year.
The FTSE 100 has, meanwhile, only seen a fall of almost 2% in the same period.
It’s hard to argue that it hasn’t been a poor investment in 2023.
However, if you look at it another way, this also reflects a great way to help make a second income.
That’s because the cost to obtain the dividend for Legal & General shares is now 11% cheaper than at the start of the year.
The path to passive income
At the time of writing, Legal & General shares are currently trading at £2.25, yielding 9.2% in dividends.
While dividends aren’t guaranteed, I could in theory generate £250 in monthly passive income with an initial outlay of £32,608.70 on its shares. However, I appreciate that this is an extremely large sum of money, and I also wouldn’t want my portfolio to be unbalanced and undiversified, of course!
It’s unlikely to remain at this level, either. For example, the interim dividend paid has increased by 138% over the last 10 years. I therefore expect the extra £250 of monthly income to continue growing over time.
I could make even more per month over time if I reinvested some or all of the dividends I received back into the stock.
Financial services risk
Being in the financial services world poses a risk to holding Legal & General shares.
This is because investors are currently very sceptical of the sector. This has resulted in great volatility of share prices in the industry.
For example, during the US banking crisis back in March, Legal & General shareholders witnessed its shares decline by 13.9% in just 8 days.
Why I’m still confident in the stock
Legal & General shares may have experienced unwanted volatility, but I believe this is highly unjustified.
Operating profit has declined by 1.77% in the first half of 2023.
Therefore, the 11% share price decline this year indicates overselling of its shares.
In fact, its shares are now trading with a price-to-earnings (P/E) ratio of just 6.8.
This provides me with a great opportunity to acquire its future stream of dividends at a rock-bottom price.
Moreover, considering that interest rates have risen rapidly, the fall in operating profit looks very insignificant. In fact, it’s a sign of the company’s resilience in the face of tough economic times.
Furthermore, I don’t believe the dividend is in much danger as Legal & General has a dividend cover of 1.9.
Therefore, it’s clearly making more than enough profit to cover its dividend.
Now what
The dividend yield is very high, mainly because of the share price decline.
I don’t believe the reasons for this decline are justified, so I can’t imagine the cost to acquire the future stream of dividends remaining this cheap for long.
Additionally, if I put into perspective that the yield for the FTSE 100 as a whole is only 4%, I’d buy Legal & General shares today, if I had the spare cash to do so. Finding as much as £32,600 down the back of the sofa might be a stretch, though!
