Legal & General shares: a once-in-a-decade passive income opportunity?

Is a dividend yield at its highest level in a decade, combined with a strong record of increasing payouts, a passive income opportunity that’s too good to miss?

| More on:
Black father and two young daughters dancing at home

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With a dividend yield at the highest level for 10 years, Legal & General (LSE:LGEN) shares look like an obvious buy for passive income investors. Along with the big dividend yield, the company has a good record of returning cash to shareholders.

With interest rates set to fall, it’s likely to be more difficult to find investment opportunities in the next few years. So should investors jump at the chance of 8.8% per year in dividend income?

Dividends

Legal & General has a strong track record when it comes to dividends. Over the last decade, the company has increased its annual distribution to shareholders every year except one.

Legal & General dividends per share 2014-24


Created at TradingView

The exception is 2020, during Covid-19. I view that positively, though, as the firm’s management at the time was focusing on running the business in a responsible way.

There was a lot of uncertainty during the pandemic around potential losses from business interruption claims. Increasing the dividend during this time would have been risky. 

While the company has a strong record of increasing its dividend, it’s arguably even better than it looks. The distributions have been growing but without taking unnecessary risks.

Risks

It’s probably worth emphasising the word ‘unnecessary’ in that last paragraph, though. The insurance business is all about risk and Legal & General is no exception.

One of the biggest challenges is inflation. When insurers write policies, they have to try and figure out what the future cost of a claim might be – and rising prices bump this up.

With car insurance, this isn’t so bad. Policies typically last a year and then insurers get the opportunity to reassess what the proper rate should be given the likely costs. 

In life insurance, policies last for decades. And if inflation comes in higher than expected over the long term, Legal & General could have to pay out much more than it anticipates.

A once-in-a-decade opportunity

Neither Legal & General nor its shareholders can do much about inflation. In both cases, the best they can do is make sure they’re adequately compensated for the risks they take on.

For the business, that means setting prices to reflect the chance of higher future costs. And for investors, it means buying the stock only when there’s a big enough return on offer.

Legal & General dividend yield 2014-24


Created at TradingView

That time might be now – Legal & General shares currently come with a dividend yield of 8.8%. Barring a few share price fluctuations, that’s the highest it’s been for a decade. 

With interest rates looking likely to come down from here, I’m not expecting the stock to stay at this level for long. So I think this could be a rare opportunity for passive income investors.

Risks and rewards

Insurance is all about assessing risks and being willing to take them when the compensation on offer for doing so is adequate. And it’s the same when it comes to investing.

Whether the Legal & General share price fully reflects the risk of inflation is impossible to say with certainty. But an 8.8% dividend yield helps push the odds in favour of investors.

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.

Stephen Wright has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

Is this one of the FTSE 100’s best-value growth shares?

Looking for great-value recovery shares to buy today? Based on City forecasts, this could be one of the best that…

Read more »

Investing Articles

Will the Tesco share price hit a 10-year high in 2024?

Up from 200p less than two years ago, the Tesco share price has enjoyed impressive growth lately. Now I'm considering…

Read more »

Electric cars charging in station
Investing Articles

Where will Tesla stock be in 5 years? Here’s what the experts say

The analysts' outlook for Tesla stock in the next few years seems to be all over the place, as the…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Nearing its 12-year low, this FTSE growth stock could be the bargain of the year!

Harvey Jones has happy memories of owning this FTSE 100 growth stock. Now he's wondering whether to take a trip…

Read more »

Investing Articles

BT share price: a bargain or one to avoid?

This Fool has been keeping tabs on the BT share price. Despite looking cheap, he's steering clear of the stock…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

3 reasons why I predict UK shares will soar over the next 12 months!

Our writer believes there are plenty of reasons why UK shares will do well over the next year or so.…

Read more »

Investing Articles

Are these the best stocks to buy after the UK election?

With Labour now leading the UK, change is on the horizon. I'm considering the best stocks to buy based on…

Read more »

Investing Articles

1,000 shares in this FTSE 100 stalwart would give me £525 of dividends!

The FTSE 100 is packed full of stocks offering sizeable dividend yields, but I feel this one is the pick…

Read more »