Legal & General (LSE:LGEN) shares currently come with a 9% dividend yield. And the company has a strong track record of being disciplined with its shareholder distributions.
But I think investors looking for passive income have better opportunities. Both the FTSE 100 and the FTSE 250 have dividend stocks I think look attractive at the moment.
Legal & General
On the face of it, Legal & General shares look like a great investment opportunity. It’s a rare example of a stock with a 9% dividend yield that isn’t a tobacco company.
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It’s an insurance company – and, unlike cigarette volumes, demand for life cover isn’t in structural decline. So there’s clearly a lot to like.
Nonetheless, it isn’t a stock I’m looking to buy. Contracts in the life insurance industry can last for decades and that means there’s a long time for unforeseen losses to develop. That’s enough to put me off the stock.
If I was going to buy shares in a life insurance company, I’d choose Legal & General. But the structure of the industry still puts it on my list to avoid.
Diageo
For my own portfolio, I’d rather buy Diageo (LSE:DGE) shares. The stock has a much lower dividend yield – at around 3.5% – but I think the outlook’s much more predictable than Legal & General’s.
Diageo’s been dealing with issues of its own lately. These include weak consumer spending in the US and the value of the Nigerian naira falling relative to other currencies.
These however, look like short-term issues. Over the long term, the company’s category-leading brands and unmatched distribution give it a big advantage over its competitors.
I also think the market for premium spirits is set to grow over time. So a dominant position in an important industry is why I’d opt for Diageo shares, even with a much lower dividend yield.
Ibstock
Ibstock’s (LSE:IBST) another stock I’d be happy to buy at today’s prices. Shares in the FTSE 250 brick manufacturing company come with a 4% dividend yield and attractive long-term prospects.
Higher costs are a potential risk. With the Bank of England aiming for 2% inflation a year, the company will either need to find ways to increase prices or face pressure on margins.
I think Ibstock’s in a decent position when it comes to pricing. The UK has a shortage of housing and not enough local supply to meet the demand needed to rectify this.
As a result, I see the stock as a reliable source of income going forward. That’s why I’d prefer it to Legal & General, where the outlook’s fundamentally uncertain.
Passive income
It’s easy to see why passive income investors are attracted to Legal & General shares. But I think the 9% dividend yield’s trying to make up for some potentially significant long-term risks.
For my own portfolio, I’d rather take the returns from Diageo than Ibstock. These might be lower in the short term, but I think the relative predictability makes it worth it.
