One of the income shares in my portfolio is financial services company Legal & General (LSE: LGEN). For a member of the FTSE 100 index of leading companies, the Legal & General dividend yield of over 9% is already unusually high.
That helps explain why I continue to own the shares. But when the stock market next sinks, what could happen?
Possibility of a dividend cut
The company has set out plans to raise its dividend annually in coming years. But go back to 2020 and its dividend was held flat due to concerns about the impact the pandemic might have on its business.
Step back further in time, to the 2008 financial crisis, and the dividend was cut. The sort of market turbulence seen back then is unusual, but it does happen from time to time.
During a financial crisis, there can be pressure on financial services firms. On one side, clients and policyholders may be keener than normal to get at their cash. On the other hand, the valuation of the investments a firm owns can be swinging around wildly, putting extra pressure on it to keep meeting capital requirements.
So when the next stock market crash comes, I see a risk that the Legal & General dividend could be cut again.
Why I’d buy in a downturn
Perhaps, surprisingly, I think that could actually be good news for a small investor like me. Concern about a cut, let alone an actual cut, might mean we see the share price move down during a big market downturn.
If the dividend is maintained, or cut and then later restored at its former level (as happened after the 2008 cut) a weaker share price could give me an opportunity to earn a Legal & General dividend yield even higher than now. Sure, I may have to wait. But as a long-term investor, that suits me fine.
To illustrate, imagine I had bought the shares when they hit rock bottom in 2020. I would now be earning a yield of over 13% instead of the 9.1% I can earn investing today.
Lots to like
That presumes the dividend can be sustained over the long run. In a highly competitive industry, Legal & General needs to do a lot to keep rivals from eating into its market share.
But it has a lot going for it. I like its focus on retirement-linked products, a market I expect to benefit from long-term resilience. It also has a large customer base and well-known brand.
The company has announced plans to reduce the annual rate of dividend increase from next year onwards, potentially reducing its appeal as an income share. But it still plans to keep growing the payout (though never guaranteed in practice) and has a juicy yield.
Legal & General is on my shopping list in case the next stock market correction or crash pushes its price down far enough.
