Legal & General Group (LSE: LGEN) shares come with one of the most generous dividends on the entire FTSE 100. They currently yield a stunning 8.74%, which will only look more attractive when interest rates are cut and savings rates and bond yields fall as a result.
If I locked money away in a five-year savings bond I’d get a fixed rate of around 4.25% today, roughly half the Legal & General yield. That’s down from 5.8% a year ago and is likely to fall further. By contrast, Legal & General has just hiked shareholder payouts 5%. The income is rising, not falling.
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Dividends aren’t guaranteed and my capital is at risk. On the other hand, I’ll benefit if the share price grows.
FTSE 100 high yielder
Unfortunately, the share price is trading at similar levels to a decade ago (albeit with ups and downs along the way). The company has become a bit bloated and struggled to generate convincing growth.
Yet with the UK economy growing after last year’s short-lived recession, I see a glimmer of optimism. The shares are up 6.45% over one year. Throw in the yield, and the total return is 15.9%.
First-half results published on 7 August showed profits rising to £849m, a modest increase of just 1% but better than expected. The board expects 2024 core operating earnings to grow by mid-single digits.
Legal & General has benefitted from a spike in annuity sales, as pensioners lock into a decent number before interest rates fall. When rates retreat, annuity sales are likely to reverse. That could weigh on future results.
However, this all this is short-term stuff. It’s the long term that matters. L&G is a solid blue-chip with a 188-year history. It now has two big opportunities to grow the business. First, in the fast-growing bulk annuity market, which involves taking over companies’ final salary schemes and managing them. Second, it’s targeting the mighty US market.
Top blue-chip stock
The dividend looks secure, with the group generating surplus cash of £731m in the first half. The dividend per share has grown steadily over the last decade, with just one freeze during the pandemic. Let’s see what the chart says.
Chart by TradingView
The board plans to increase the full-year 2024 dividend by 5% but will increase payouts by just 2% a year up to 2027. That’s a shame but given today’s sky-high yield, I can live with it.
Legal & General looks set to pay a total dividend of 21.36p per share in 2024. I currently hold 1,930 shares, which will give me a very welcome income of £412.
If I wanted to increase that to £1,000 a year, I’d need to up my stake to 4,682 shares. Which means buying another 2,752. At today’s price of 231.9p, that would cost me £6,382 (or £10,858 if I was starting from scratch with no shares).
I don’t have quite that much in my trading account today, but when I do, I’ll increase my stake in L&G to bag that juicy income stream. With luck, I’ll get a bit of share price growth too.
