A significant chunk of my portfolio is constructed around high-yielding stocks, with the aim of earning a passive income. That’s not to say I don’t expect some stock appreciation along the way. Unfortunately, over the past 10 years, the Legal & General (LSE: LGEN) share price has pretty much gone nowhere. But it has more than made up for it with sector-leading dividend payouts.
Shareholder returns
I bought my first tranche of shares in the insurance and asset management giant back in 2020. Since then, the dividend per share has risen 21%. Today, the dividend yield is a mammoth 8.6%. Speaking hypothetically, if the yield remained at that rate, and I reinvested dividends along the way, I would double my money in just over eight years!
Some may baulk at the lack of capital appreciation. But I look at things in a different way. Unless a stock goes to zero, only two numbers matter to me: the price paid at time of purchase and the price upon sale. Everything in between is just noise.
What is of greater concern to me is dividend growth and sustainability. Dividend cover is certainly on shaky grounds, as it is only just covered by earnings. But that said, even when profits fell during Covid, there was no cut.
As a long-term investor, what I look for is evidence of a robust business model capable of supporting sustainable cash flows through the ebbs and flows of the business cycle.
Pension risk transfer
The cash cow for Legal & General is pension risk transfer (PRT), responsible for over 50% of total operating profit in 2024.
Defined benefit (DB) (or final salary) pension schemes are no longer the default choice for most UK employers today. However, among existing schemes, PRT remains the most attractive option for DB trustees who are looking at ways of derisking their pension liabilities.
Out to 2028, it expects to write between £50bn to £65bn of PRT. This will generate a steady store of guaranteed future profits. It will also enable the business to invest the proceeds from DB providers into its asset management division.
Back in February, the business announced the sale of its US insurance entity to Meiji Yasuda. As part of the deal, both companies agreed to enter into a strategic partnership to drive growth in the key US PRT business.
One significant risk is growing competition. In a first in the UK since 2007, Brookfield Corporation was granted a dedicated PRT licence earlier this year. The global market is expected to grow to £1trn over the next 10 years, but L&G will need to work hard in order to secure lucrative new schemes.
Continued innovation
The wealth industry is evolving fast and investors are taking a much more activist approach toward retirement planning. Last year, the business launched the L&G Private Markets Access Fund. This provides investors with opportunities to invest in a wide array of assets, including affordable housing, clean energy, and natural resources. I view this as a massive growth area, particularly in light of the recent government announcement promoting such investment vehicles.
I envisage Legal & General remaining a core holding in my Stocks and Shares ISA until I retire. Until that point, I will continue my strategy of pound-cost averaging whenever finances allow.
