Passive income can provide life-changing regular dividend payments. These can be used to make life better before retirement or as a means of retiring early. And all of this can be done with little effort from the investor – hence the ‘passive’ label.
One of my core holdings to achieve this is FTSE 100 insurance and investment giant Legal & General (LSE: LGEN).
It pays one of the highest dividend yields in any leading FTSE index. Its significant discount to fair value helps reduce the risk of share price losses affecting these returns. And extraordinary earnings growth potential is likely to propel both its share price and dividends higher.
Earnings growth
Rising earnings ultimately drive a company’s share price and dividends.
A risk to Legal & General’s is the intense competition in the sector that may squeeze its margins. However, consensus analysts’ forecasts are that its earnings will grow by a colossal 49.1% each year to end-2027.
These projections look well supported by recent results, including its H1 2025 numbers released on 6 August. These showed core operating profit rising 6% year on year to £859m, outstripping analysts’ estimates of £816m.
Its Solvency II capital generation rose 3% to £729m, giving a total coverage ratio of 217%. This compares to the minimum requirement of 100% for the insurance and investment sector.
And its contractual service margin increased 2% to £12.1bn. The company will recognise this profit over the life of the insurance contracts.
Deeply undervalued share price
A discounted cash flow (DCF) valuation shows Legal & General shares are 52% undervalued at their current £2.58 price.
This modelling pinpoints where any firm’s stock price should trade, based on cash flow forecasts for the underlying business.
Therefore, the fair value for its shares is £5.38.
In my experience as a former senior investment bank trader, assets tend to converge to their fair value over time, although this is not guaranteed.
Passive income payments
In 2024, Legal & General paid a dividend of 21.36p. This gives a current dividend yield of 8.3%. Analysts forecast this will rise to 8.4% this year, 8.6% next year, and 8.8% in 2027.
So, investors considering a £10,000 holding in the firm would make £12,868 in dividend payments after 10 years. This is based on the current average 8.3% dividend yield and the dividends being reinvested back into the stock. This is known as ‘dividend compounding’.
On the same basis, the dividends would rise to £109,583 after 30 years.
Including the initial £10,000 stake and the total value of the Legal & General holding by then would be £119,583. This would pay £9,925 each year in passive income from dividends by that point!
Will I buy more of the shares?
I do not doubt that the firm’s exceptionally strong earnings prospects will power the share price and dividends higher over time.
Given this, I have zero hesitation in buying more of the stock as soon as possible.
