I’d buy 11,220 Legal & General shares for £200 a month in passive income

Our writer considers how much money investors would have to put into Legal & General (LON:LGEN) shares to target £2,400 a year in dividends.

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I’ve been building up my position in Legal & General (LSE: LGEN) shares for a couple of years now. But with the forward dividend yield currently at a juicy 8.46%, I’d like to bag a load more for my ISA.

It would be nice to get to a position where the FTSE 100 stock is paying me the equivalent of £200 a month in passive income. Here’s what it would take to get there.

Great all-round value

First, I should explain why I like these particular shares. There are a number of reasons.

As mentioned, the dividend yield is 8%+, which towers above anything I can get from a FTSE 100 tracker fund or a savings account. The firm has an excellent track record of increasing its payout.

While there’s no guarantee this run will continue, I still like to see a history of rising dividends.

Second, the shares are trading on a forward price-to-earnings (P/E) ratio of around 10, and a price-to-sales (P/S) ratio of 0.83. That’s cheaper than peers in the sector.

Also, Legal & General has a strong balance sheet. At the end of 2023, its Solvency II ratio was 224%. This is well above the 100% regulatory requirement and indicates financial strength.

Passive income

For 2024, the insurer is expected to pay out 21.4p per share in dividends. So I’d need to buy approximately 11,220 shares to target £200 a month in passive income.

Right now, those would cost me about £28,350. This tells me I’d better get saving more cash to reach my target!

For someone starting from scratch, they could achieve this in just over four years investing £550 a month in the shares.

Of course, this assumes a static share price, which is unlikely. In reality, it’ll fluctuate over this period. And I’d also want a diverse basket of stocks to offset the risk of a dividend cut at just one.

Finally, just to clarify, the firm pays out twice a year, usually in June and September. Therefore, £200 per month would only be an equivalent amount.

Undervalued

Naturally, there are risks. The company has exposure to the UK economy and property market. Any significant economic downturn could severely impact the valuation of its investments.

Also, a meltdown in some part of the global financial system would likely cause share price volatility.

Despite these risks, I think the shares remain undervalued. The firm’s pension risk transfer business is enjoying record growth as more pension funds offload liabilities.

In 2023, an estimated £50bn of UK pension liabilities were secured with various insurers. In the US, where it has a growing presence, the figure was $45bn.

But the company says that around “£1.4trn and over $3trn of respective DB [defined benefit] pension scheme assets [are] still sitting on company balance sheets. This suggests a multi-decade run off and the prospect of healthy markets for many years to come.”

Meanwhile, the UK’s over-65 population is growing rapidly, so there should be naturally higher demand for retirement income products.

Legal & General’s reputation as one of the UK’s top pension brands positions it well to capitalise on this ageing demographic trend.

Nobody can predict the future with certainty, but I feel the stock will be paying dividends for many years to come.

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.

Ben McPoland 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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