As a shareholder in FTSE 100 financial services company Legal & General (LSE: LGEN), how much the company pays out as dividends matters to me. At the moment, it has what I consider a highly attractive dividend yield of 9.2%. I have therefore been thinking about what might happen to the Legal & General dividend in the next few years.
What the current plan means
This is helped by the fact that the firm has clearly laid out its intentions. For its current financial year, the company foresees a 5% increase in dividends per share.
For the three years following that, the expectation is growth of 2% annually in the Legal & General dividend per share. In addition, a buyback programme is planned that could help potentially boost earnings per share.
Last year’s dividend per share was 20.3p. Based on a 5% increase, I expect this year’s dividend per share to come in at around 21.2p.
Following that, I expect a 2025 dividend of around 21.7p per share, followed by 22.1p in 2026 and 22.5p in 2027. If the 2% growth is maintained beyond the lifetime of the current plan, that would mean 2028 sees a dividend of 23p per share.
Given the current Legal & General share price, that means the prospective yield on a five-year basis is roughly 10.2%. I certainly find that attractive.
Things could get even better
Not only that, but I actually think that forecast might understate the size of the potential dividend five years from now (or the prospect of a special dividend along the way).
Legal & General has a strong brand, large long-term customer base and proven business model. I expect demand for retirement-linked financial products to remain strong. The company has proven it can produce sizeable excess cash flows.
The board plans to reduce the rate of annual dividend growth and put some of that spare cash into buybacks. Since it announced that plan in June, the shares have fallen 2%, suggesting that the City does not feel the capital return plan is particularly exciting.
If the company keeps doing well and the board wants to try and boost the share price, I think it could choose to increase the dividend faster, or declare a special dividend, at some point over the next five years.
Nothing’s ever guaranteed in the stock market
On a more pessimistic analysis though, we could see the Legal & General dividend being cut as happened back in 2008. A financial crisis could lead investors to pull funds nervously making it harder for the firm to keep paying dividends when it wants to shore up its capital position.
In the following years, Legal & General brought its dividend per share back to its level before that cut – and it has since far surpassed that.
So I recognise the risks, but am happy to keep owning this income share.
