Can I really make this much passive income from £11,000 invested in this FTSE dividend superstar?

This FTSE 100 dividend giant pays big dividends that can make me very high passive income over time, especially if the payouts are compounded.

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BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.

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Since I turned 50 a while back, I have focused on FTSE shares that pay high dividends. This is because I want to increase my passive income so I can further reduce my working commitments.

Passive income is money made from minimal daily effort, allowing me more time to do other things.

One of the earliest shares I bought (around 35 years ago) was Legal & General (LSE: LGEN). I did not know back then what passive income was. But I liked the idea of dividend payments just rolling into my bank account.

I still do, and I regard the FTSE 100 asset manager as one of the best companies for generating high passive income.

How much can be made?

Currently, it pays a dividend that gives me an 8.4% return on my money. So, if I was starting out again now with maybe £11,000 (the average UK savings amount) that would make me another £924 this year.

If, as when I was younger, I withdrew this dividend every year, I would make £9,240 after 10 years. That is providing this 8.4% yield averaged the same over the period. Yields do vary as share prices and dividend payouts change.

What I found out (early on, thankfully) was how much more I could make if I reinvested the dividends back into the stock. This is known as ‘dividend compounding’ and is the same principle as compound interest in a bank account.

Using dividend compounding, after 10 years at an 8.4% average yield, I would have £25,406 instead. This would pay me £2,040 of passive income each year, or £170 every month.

After 30 years of doing this, I would have £135,520, paying me £10,882 a year, or £907 each month!

Are the dividends sustainable?

For this to work over a long period, a company needs to generate sufficient income to pay the dividends. In this context, Legal & General has always looked solid enough to me, and it still does.

On the risk side, its 3.8 debt-to-equity ratio is higher than the 2.5 or so considered healthy for investment firms. So I would like to see that trending lower over the next three years.

However, last year it made an operating profit of £1.67bn, against 2022’s £1.66bn.  It has also forecast cumulative Solvency II capital generation of £8bn-£9bn by the end of this year. Both of these are strong capital buffers for the future.

Overall, consensus analysts’ estimates are for its earnings to grow by 21.9% a year to the end of 2026.

Forecasts are also for total dividends of 21.4p in 2024, 22.7p in 2025, and 24.2p in 2026. On the current share price of £2.43, this would give annual dividend yields, respectively, of 8.8%, 9.3%, and 10%.

Some 35 years ago I was lucky enough to stumble into buying Legal & General and have benefitted ever since.

And 35 years later, having learned a lot as a former investment bank trader, I still see it as one of the best dividend shares around.

So, I will be adding to my holding once again very soon indeed.

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.

Simon Watkins 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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