Should I buy Legal & General or Phoenix Group for a mega passive income?

Millions of us invest in stocks for a passive income, and there are very few stronger dividend stocks than these two. But which one’s best?

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When it comes to passive income, there are very few stocks more popular with investors than Legal & General (LSE:LGEN) and Phoenix Group (LSE:PHNX).

These insurers offer some of the strongest dividends on the FTSE 100 — 8.12% and 10.62% respectively — and this is supported by the strong cash flows the sector’s famed for.

So simply, which one’s better? Spoiler, it’s very hard to choose.

Legal & General’s operating profit for 2023 came in a little lower than expected at £1.67bn — £1.75bn had been forecast. However, analysts remain bullish on it with new chief executive Antonio Simoes’ vision to streamline the company heightening interest.

While Simoes kept his cards close to his chest in a recent earnings call, a more streamlined group would likely be welcomed. The company’s reportedly considering the sale of its Cala Homes unit, purchased in 2018. The sale, potentially to Persimmon, could bring in £1bn.

Despite missing estimates, the company’s fundamentals remained strong enough to support a full-year dividend per share increase to 20.34p. Moreover, L&G’s Solvency II capital coverage ratio was 224%, indicating strong financial health, despite a slight decrease from 236% in 2022.

The health of the UK economy and interest rates remain a headache for Legal & General and its peers. We’re not out of the woods yet, but an improving economic picture should support operations moving forward.

Phoenix Group

Phoenix Group’s shifting from a closed-book business model to one which generates substantial new business. In 2023, Phoenix’s net fund flows from new business surged by 72% to £6.7bn, though legacy outflows of £10bn remain a challenge.

Despite this, the firm’s been performing well. It achieved its 2025 new business cash generation target two years early, with £1.5bn delivered in 2023. With strong new business cash generation, a solid balance sheet, a £3.9 billion Solvency II surplus and a 176% capital coverage ratio, the fundamentals are positive.

As the economic environment improves and, as a result of the Phoenix’s strategic efforts, the company expects to yield positive net fund flows from 2024 — the first time in its history. That’s a significant milestone.

Sadly for investors, Phoenix Group shares have underperformed in recent years. The 10.62% dividend would have provided some relief however.

For now, higher interest rates remain a headwind, negatively impacting asset values and posing a threat in the form of credit risk.

Looking forward, this headwind should become a tailwind as interest rates fall.

Little to choose between them

I own both these stocks and, honestly, I find it hard to choose between them. However, Phoenix Group has the edge with analysts as a whole.

Analysts share price target for Legal & General infers a 12.2% premium to the current price. That’s encouraging. The average share price target for Phoenix Group is actually 22.8% higher than the current share price.

Coupled with Phoenix Group’s larger dividend, it does appear a more attractive investment opportunity.

Nonetheless, this should be tempered by recognising its larger debt position, and the uncertainties of its transitioning operations.

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.

James Fox has positions in Legal & General Group Plc and Phoenix Group Holdings 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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