£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.

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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%.

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.

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!

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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