Legal & General (LSE: LGEN) shares have long been a core holding in my passive income portfolio.
I constructed this when I turned 50 a few years ago to maximise the income I made from dividend-paying shares.
This should allow me to reduce my daily working commitments further and live off these stock returns.
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Adjusting the portfolio for a 7%+ yield
My minimum requirement for a stock’s inclusion in this portfolio is an annual yield of at least 7%. This is because the ‘risk-free rate’ (the 10-year UK government bond yield) is around 4%, and shares have risks attached.
Should any of my passive income stocks fall below this yield, it is flagged for possible sale.
If the fall is due to a share price rise, I will probably keep it. This is because it is a technical adjustment only, as share prices and yields move in opposite directions.
However, if it is due to a dividend payment reduction, I will probably sell it. A dividend cut is never a good sign for a company, in my experience.
What is the yield outlook here?
Legal & General raised its interim dividend this year by 5%, from 5.71p a share in 2023 to 6p.
If this rise were applied to the total dividend in 2023 of 20.34p, then the full payment this year would be 21.36p. On the current share price of £2.23, this would give a yield of 9.6%.
This compares to the average FTSE 100 yield of 3.7%, and the FTSE 250’s 3.3%.
Looking further ahead, consensus analysts’ forecasts are that these dividend payments will increase in 2025 to 21.9p, and in 2026 to 22.5p. Based again on the current share price, these would give respective yields of 9.8% and 10.1%.
Ultimately, dividends are powered by earnings over time. A risk here is that a renewed surge in the cost of living might cause customers to cancel their policies.
However, analysts forecast that Legal & General’s earnings will grow by 27.3% each year to end-2026.
How much passive income can be made?
I began investing in shares over 30 years ago with around £9,000. Investing this amount now in Legal & General shares would make £819 from their 9.1% yield.
If this averaged the same over 10 years, I would make £8,190, and over 30 years £24,570.
A pretty good return certainly, but much more could be made if I used the dividends paid to buy more Legal & General shares.
The power of dividend compounding
This is called ‘dividend compounding’ and is the same idea as leaving interest in a bank account to grow.
Using this method with the same average yield in place would generate an extra £13,282 after 10 years, not £8,190. And after 30 years on the same basis, there would be an additional £127,582 rather than £24,570!
Adding the original £9,000 to the pot would give an investment worth £136,582. This would pay £12,429 a year by that point, or £1,036 each month!
Will I buy the shares?
I already own Legal & General shares for their superb yield, strong growth prospects and extreme undervaluation. I intend to buy more very soon for precisely the same reasons.
