With a yield of 9.3% and a dividend increase of 456% since 2009, is this the ultimate passive income stock?

Our writer takes a look at a FTSE 100 share that — on the face of it — has all the credentials to make it a top stock for long-term passive income.

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I think the best passive income stocks are the ones that are likely to pay above-average dividends for a sustained period of time.

And since 2019, Legal & General (LSE:LGEN) has been doing just that. During this period, it’s increased its payout every year — except in 2020, when it was unchanged due to the pandemic.

For the year ending 31 December 2024 (FY24), it’s intending to pay 21.36p a share. In cash terms, this is more than 4.5 times higher than its dividend for FY09.

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Impressively, the average annual increase since 2015 has been 8.3%.

Chart by TradingView

And with a current (18 October) share price of 230p, this implies a yield of 9.3%. This is comfortably above the average for the FTSE 100 of 3.8%.

But an increasing dividend and a stagnant (or falling) share price will push the yield higher. Of concern, in October 2015, the financial services provider’s shares were changing hands for 7% more than they are today.

However, as the chart below shows, even taking into account the disappointing share price performance, the stock has always yielded at least 4.5%, since 2015.

Chart by TradingView

Looking to the future

But the company’s warned investors that the dividend is only going to increase by 2% a year through until FY27.

Although it claims that its planned share buyback programme will benefit investors by more than the equivalent of increasing its annual payout by 5%, personally, I’d rather have the cash in my hand.

However, dividends are never guaranteed.

And Legal & General’s particularly vulnerable to an economic slowdown. Higher interest rates have helped its annuity business but increased borrowing costs are generally bad for its other divisions.

Its earning suffered during the 2008-2009 financial crisis and it had to cut its payout as a result.

The group also operates in a highly competitive market where competition is fierce and earnings could suffer as a result. During the first six months of 2024, the group reported a net outflow of funds under management.

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An encouraging outlook

But there are two aspects of its business that make me confident that it can grow its earnings over the medium term, which should help maintain the healthy dividend.

Firstly, its pension risk transfer arm has a huge pipeline of potential deals (£24bn). The company hopes to make money from these assets by generating more than the retirement benefits it has to pay.

Secondly, the potential earnings — known as the “store of future profits” — from its insurance business was £14.7bn, at 31 December 2023. This is the present value of the cash flows it expects to generate over the lifetime of its contracts. Although this calculation is sensitive to the assumptions made, I think it’s worth noting that it’s more than the group’s current market cap (£13.5bn).

Final thought

The headline to this article poses the question as to whether Legal & General is the ‘ultimate’ passive income stock.

This is a high bar to reach. And there are some stocks offering a better return and a few — not many — with a longer track record of growing their dividends.

For these reasons, I’m going to say that it’s one of the best dividend stocks around. And that’s why it’s on my watchlist for when I’m next in a position to invest.   

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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