The FTSE 100 has some incredible opportunities for investors looking to build a second income stream right now.
One that leaps right out at me is insurer and asset manager Legal & General Group (LSE: LGEN). With a forecast yield of a mind-boggling 9%, it’s set to pay one of the most attractive passive income streams on the blue-chip index in 2025.
While there’s plenty of dividend income on offer, share price growth has been in short supply. But after a rough few years, that’s starting to show some life too.
Can this FTSE 100 dividend hero thrive?
Legal & General shares may have climbed 14% over the last three months, although they’re still down around 5% over the past year.
It’s been a bumpy few years for financial stocks in general. Many investors expected interest rates to drop sharply as inflation cooled last year, but that hasn’t happened.
Higher-for-longer rate expectations have weighed on stock markets, with volatility further fuelled by Donald Trump’s tariff threats. That hurts Legal & General, which has a mighty £1.2trn of assets under management.
It also means that cash and bonds are still offering attractive returns. That makes riskier assets like Legal & General shares less immediately appealing. But at some point, interest rates will start to fall, and when they do, that ultra-high yield will look even more attractive.
So is the dividend sustainable? One concern is that earnings cover remains on the thin side, at 1.1 times earnings. Ideally, I’d like it covered around twice. But despite my concerns, Legal & General remains committed to rewarding shareholders.
The company’s full-year results published on 12 March included plans to buy back £500m of shares this year. That’s part of the group’s wider strategy to return more than £5bn to shareholders over the next three years in total.
Core operating profits rose 6% to £1.62bn, in line with guidance, as growth in the retail and institutional retirement divisions offset a decline in asset management profits.
Dividends, share buybacks and possibly growth
Dividend growth will slow though. Legal & General hiked its full-year 2024 payout by 5% to 21.36p, but between 2025 and 2027 it will increase by just 2% a year.
Another concern is that Legal & General’s price-to-earnings ratio has surged past 80, largely due to falling earnings per share. They’ve suffered large double-digit drops in each of the last three years. That’s super-high but hopefully a little misleading and it will reverse itself. It’s a risk though.
Operating margins are forecast to rise from 8.6% to 13.2%, suggesting profitability may be on the mend.
So what does the future hold for the share price? The 16 analysts covering the stock have set a median target price of 265.3p. If accurate, that suggests a 10% rise from today. Combined with its high yield, that could push total returns towards 30% over the next 12 months.
Of course, forecasts are never guaranteed, and an economic shock or weak results could easily knock the share price down 10%, or more.
Legal & General shares are well worth considering, but investors should look beyond the next 12 months. They should aim to hold for years, potentially decades, to give those dividends and any growth time to compound. When they finally retire, they can hopefully let the second income flow.
