1 stock I’d buy to target a £2,700 passive income from £20k

An investment in this FTSE 100 stock could provide a whopping 13.5% passive income in a few years’ time, says shareholder Roland Head.

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Is it possible to generate a reliable passive income of nearly 14% from dividend shares?

I think so. Here, I’ll explain how I’m aiming to do just that with one of my current shareholdings.

Consistency is key

For this example, I’ve chosen a FTSE 100 stock that’s known for its high dividend yield and consistent cash flows.

Life insurance and savings giant Legal & General Group (LSE: LGEN) has more than £1trn in assets under management and hasn’t skipped a dividend payment for at least 35 years.

Although its dividend payout was cut during the 2008 financial crisis, it was quickly rebuilt. The current payout is more than three times higher than the 2008 dividend.

More to come?

Looking ahead, broker forecasts suggest it will pay a dividend of 20.3p per share with respect to 2023. That result will be confirmed when the company publishes its full-year results in March. If it’s correct (which I expect), then the shares offer a forecast yield of 8.5%.

This dividend yield is already quite high, but it looks fairly safe to me, based on the group’s recent performance.

There are no guarantees, but I think the market would be surprised if Legal & General cut its payout in the next few years.

Of course, 8.5% is still well below the nearly 14% level I mentioned above. This is where consistency (and a little patience) is needed.

L&G’s dividend has risen by an average of just under 5% per year over the last five years.

Broker forecasts suggest this rate of payout will be maintained over the next couple of years, at least.

I reckon this rate of growth could continue for a little longer than this. If I’m right, the dividend yield on cost (compared to the current share price) will increase significantly over the next five years:

YearDividend yield (forecast)
20238.5%
20248.9%
20259.3%
20269.8%
202710.2%
202810.7%

My sums suggest that by 2028, Legal & General shares purchased at current levels could be generating a dividend yield on cost of 10.7%, based on a purchase price of 240p.

If the company’s 5% annual dividend growth continued for the next 10 years, that yield could reach 13.5% in 2038.

Based on an initial investment of £20,000, this would generate an annual income of £2,700. Of course, current broker forecasts don’t yet support my prediction for that final decade. But for the reasons mentioned in this article, I feel that the 13.5% dividend yield is possible.

What’s the catch?

Legal & General’s high dividend yield suggests that it’s out of favour with investors at the moment.

As far as I can see, there’s nothing wrong with the business. Its growth rate may not be very exciting, but it’s a market leader in the UK pensions and bulk annuity markets.

The main risk I can see is that problems we don’t yet know about could emerge over the next few years. Changing conditions in financial markets might also affect the group’s performance.

What I’m doing now

I’m sitting tight on my Legal & General shares and am hoping to enjoy many more years of trouble-free passive income.

Indeed, I added a few more L&G shares to my portfolio earlier this year. This FTSE stalwart looks decent value to me at current levels.

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.

Roland Head 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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