One way to earn passive income is to park one’s money for years in shares of well-known businesses that look set to pay dividends in future.
An example of such a share is FSTE 100 financial services giant Legal & General (LSE: LGEN).
It recently set out plans to keep growing its dividend per share as it has been doing in recent years. It plans a 5% increase this year, followed by 2% annually for several years after that.
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The plan was received coolly in the City, with the shares being marked down on the day it was announced. Indeed, in five years the Legal & General share price has done worse than nothing. It has actually fallen 13%.
On top of that, the plan is just a plan. No dividend is ever guaranteed, no matter what a company intends.
For example, if a financial crisis leads clients to pull funds from its retirement products, Legal & General may see profits tumble and have to slash its dividend. It did exactly that after the last financial crisis.
Attractive dividend yield with growth prospects
All that said, dividend growth combined with a falling share price means that I like the look of Legal & General from a passive income perspective.
To begin, consider the yield.
At 8.8%, it means that I ought to earn £8.80 next year for each £100 I invest. So putting £10,000 today into Legal & General shares could earn me around £880 annually in passive income.
That is before even taking the planned dividend increases into account. A single investment now could see me earning passive income next year, more the year after that, even more the year after that – and so on and so on.
Proven business with ongoing potential
But dividends do not exist in a vacuum. For a company to pay them over the long run, it needs to generate sufficient spare cash.
So it is always important, when analysing a share’s passive income potential, to consider not only the dividend but where it might come from. How strong does the business look and what might happen to its finances?
I do see some challenges for Legal & General. A planned reorganisation threatens to distract asset managers’ attention from their core task. That could hurt performance. An uneven economic performance also brings a risk of clients redeeming policies early, hurting profits.
But looking at it in the round, I like the idea of owning Legal & General shares.
The company operates in a market I expect to see high long-term demand. It has a number of strengths that can bolster its position in that market, from an iconic brand to a sizeable client base. The company has a proven business model and has been consistently profitable over many years.
If I had a spare £10K today and wanted to grow my passive income streams, buying Legal & General shares would be on my to do list!
