Legal & General (LSE: LGEN) shares paid a total dividend last year of 20.34p. This gives a 9% yield on the current £2.26 share price. It is one of the highest in any major FTSE index. By comparison, the FTSE 100 presently pays an average of 3.6% a year and the FTSE 250 3.3%.
The average amount of UK savings is currently around £11,000 and the average in a UK savings account is £17,000. Splitting the difference gives £14,000, which would buy 6,195 Legal & General shares right now.
How much passive income could be made?
Passive income is money made from little daily effort, most notably from dividends paid by shares. £14,000 of Legal & General shares would generate £1,260 in the first year with their 9% yield. Over 10 years on the same payout, £12,600 in dividends would be paid, and over 30 years, £37,800.
This is obviously not to be sniffed at. However, a lot more could be made by using a common method of share investment.
The dividend compounding effect
This process is ‘dividend compounding’. It is the same basic idea as leaving interest to accrue in a bank account over time. But rather than interest being left, dividends paid by a stock are reinvested back into it.
Doing this with an average 9% annual yield would make an extra £20,319 rather than £12,600 over 10 years. Over 30 years, it would be an additional £192,228 in dividends, not £37,800!
Adding in the initial £14,000 stake would give a total Legal & General investment worth £206,228. On a 9% yield, this would generate yearly passive income at that point of £18,561, or £1,547 a month!
Making more from a standing start
There is still a common misconception that making big returns from stock investment requires big money upfront. This is not true – it can be done from having £0 in the bank.
For example, foregoing a pint of lager a day is enough to begin an investment journey to huge dividend returns. Specifically, saving this £5 a day (£150 a month) and investing it in 9%-yielding Legal & General shares will make £11,245 in dividends after 10 years, if they’re compounded.
After 30 years on the same basis, the total investment would have grown to £276,671. This would pay £24,900 a year in passive income, or £2,075 a month!
Earnings and dividend outlooks
Growing earnings are what drives a company’s dividend and share price higher over time.
A risk to Legal & General I think is the high degree of competition in its business sector. This could squeeze its profit margins over time.
However, consensus analysts’ estimates currently are that its earnings will rise by 28% a year to end-2026. The forecasts are for the firm’s yield to increase to 9.5% by the end of this year. For 2025, it is projected to rise to 9.8% and for 2026, to 10%.
Would I buy the stock now?
Despite already having a holding in Legal & General, I will be buying more very soon. I believe it has a stellar yield that is set to be driven even higher on excellent growth prospects.
