£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me and has a strong core business.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A pastel colored growing graph with rising rocket.

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.

FTSE 100 financial services and investment firm Legal & General (LSE: LGEN) remains one of my best high-yield shares.

In 2023, it paid a total dividend of 20.34p, giving a current return of 8.8%. The present average FTSE 100 yield is just 3.6%. That said, it looks set to pay even more, following the 5% increase in 2023’s dividend from 2022’s.

Consensus analysts’ estimates are for total dividends of 21.4p in 2024, 22.7p in 2025, and 24.2p in 2026. On the current share price of £2.32, this would give annual dividend yields, respectively, of 9.2%, 9.8%, and 10.4%.

Should you invest £1,000 in Legal & General right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Legal & General made the list?

See the 6 stocks

Are the dividends supported by growth?

Earnings and profits power increases in a company’s dividend and share price over the long term. If the former rise then the latter are likely to do so as well.

A risk with Legal & General shares is its 3.8 debt-to-equity ratio. This is higher than the 2.5 or so considered healthy for financial services and investment firms. So I would like to see this trend lower over the next three years.

However, consensus analysts’ forecasts are for earnings to increase 21.8% a year to end-2027. Return on equity is forecast to be 34.1% by that time.

Will share price losses nullify dividend gains?

Although such earnings growth is likely to drive long-term share price gains, shorter term, the picture may be different. This depends in large part on whether a stock looks undervalued or overvalued against its peers, in my experience.

To ascertain which is the case with Legal & General, I looked at the key price-to-book (P/B) measurement of stock value.

It currently trades at a P/E of 2.8. This is cheap compared to its peer group average of 3.4.

But how cheap exactly? A discounted cash flow analysis reveals it to be around 59% undervalued at the current price of £2.32. Consequently, a fair value for Legal & General shares would be around £5.66.

Created with Highcharts 11.4.3Legal & General Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL24 Jun 201924 Jun 2024Zoom ▾Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '242020202020212021202220222023202320242024www.fool.co.uk

This does not mean they will reach that price. But it significantly reduces the chance of a big, sustained price drop wiping out my dividend gains, in my view.

How much passive income can be made?

Passive income is money made from minimal daily effort, including share dividends, and I have always been a big fan.

Right now, £17,000 (the average UK savings account amount) invested in 8.8%-yielding Legal & General shares will make £1,496 this year.

If I withdrew those dividends and spent them, then next year I would have the same amount again, given the same yield.

After 10 years, I would have an additional £14,960 to add to my £17,000 investment. This would give me an investment pot of £31,960.

A nice return certainly. But it is nowhere near what I could make if I reinvested the dividends paid me back into the stock.

This is known as ‘dividend compounding’ in investment and is the same idea as compound interest in a bank account.

If I did this, with the annual dividend averaging 8.8%, then I would make an extra £22,513 instead of £14,960! My total investment pot would be £39,513 instead of £31,960.

None of this is guaranteed and I could lose money as well as make it. But after 30 years, I could have a total pot of £213,460 paying me £18,874 a year, or £1,565 each month!

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Our best passive income stock ideas

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

2 FTSE 100 and FTSE 250 stocks to consider as stock markets plummet!

Looking for lifeboats as growth-crushing trade tariffs loom? Here are two (including a FTSE 100 gold stock) I think merit…

Read more »

Number three written on white chat bubble on blue background
Investing Articles

Just released: the 3 best growth-focused stocks to consider buying in April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

£10,000 invested in Watches of Switzerland shares 1 year ago is now worth…

Watches of Switzerland shares have been decimated by Trump’s tariffs on Switzerland. Dr James Fox explores whether this is an…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

Growth stocks are crashing! Here’s what I’m doing now

Our writer shares his thoughts as growth stocks get crushed, as well as a favourite from the Nasdaq that he…

Read more »

Investing Articles

What’s going on with the Nvidia share price now?

The Nvidia share price is tanking. Once the most valuable listed company, Nvidia has seen more than $1trn wiped off…

Read more »

Investing Articles

This FTSE AIM stock has £2.3bn in net cash, and a market cap of £2.4bn!

I love this FTSE AIM stock, but it really hasn’t delivered for me yet. The stock trades with crazily low…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Down 15% in a week! Are these 5 FTSE 100 fallers screaming buys as markets plunge?

Five of Harvey Jones's favourite FTSE 100 stocks all have the same thing in common – they've fallen around 15%…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

2 stocks that have been crushed and now offer a ton of value

Edward Sheldon has been scanning the market for stocks that offer value after the sell-off. Here are two shares he…

Read more »