The average dividend yield on the FTSE 100 is 3.26%. However, logically, there are companies with a higher yield that active stock pickers can hunt and find. When an investor considers the dividend forecast, it can provide valuable insight into whether this yield is sustainable or not. Here’s one stock that has a high forecast for the coming years.
A high-yielder
I’m talking about Legal & General (LSE:LGEN). The financial services group mainly makes money from providing retirement products as well as other asset management services. It generates commissions and fees in the process, providing steady cash flows.
Over the past year, the stock price is up 5%. When I look at the dividend yield at 9.02%, I can see it’s already one of the highest-yielding options in the entire index. An immediate green flag is that the high yield isn’t driven by a fall in the stock. If the share price were down heavily, this would act to boost the yield. But that would likely be due to problems in the business.
Legal & General benefits from a good Solvency II coverage ratio. This means it has a substantial surplus over minimum regulatory capital, acting as a buffer against adverse events. In a way, this also helps to protect cash flow and as a byproduct of that, the dividend.
It also has a clear dividend policy. The board stated last year that it aims to increase the dividend per share by 5% for the full year and then by 2% for each subsequent year. Having this clear direction means the management team is a lot more accountable due to the transparent policy.
The dividend forecast
Legal & General typically pays two dividends a year. The larger of the two is announced in March each year, with the smaller one announced in August, as part of the results. The total dividend per share from the past year is 21.48p. Using the share price of 238.1p, this gives the current yield of 9.02%.
According to analyst forecasts, next year the total dividend per share is expected to rise to 21.9p. For 2027 this could rise to 22.35p, with 2028 at 22.79p. Of course, I don’t know where the share price will be at any future point in time. But if I assume it’s the same as today, then the yield could rise steadily over the next few years, as high as 9.57% in 2028.
Risks to note
Insurance-type businesses and annuities rely heavily on the spread between what they can earn on investments versus what they have to pay out (liabilities). If interest rates fall, investment returns drop, which can squeeze margins. I think UK interest rates could fall next year, so this could be a problem.
Another risk is the general issue with forecasting far in advance. The analysts are experts, but it’s still a subjective view on what income the business could pay out in years to come. Any investor has to take this with a pinch of salt. In reality, both the share price and dividend per share could be different to the assumptions. This could make the yield higher or lower than what is anticipated.
Even with this uncertainty, the fundamentals around the stock are strong in my view. Therefore, I think it’s an income stock for investors to consider.
