Legal & General (LSE:LGEN) shares are one of the hottest passive income stocks in the FTSE 100 right now. The insurance giant’s taken the lead with the highest dividend yield in the UK’s flagship index at a staggering 8.9%.
By comparison, the average currently sits closer to 3.1%. And in terms of income, that’s the difference between earning £1,780 and just £620 a year from a £20,000 initial investment.
However, as experienced income investors know, a high yield isn’t always a good thing. That’s because the higher the payout, the greater the chance of a dividend cut.
But could Legal & General be a rare and lucrative exception?
Investigating the 8.9% yield
Over the last 15 years, Legal & General shares have proven to be a strong investment. While the share price since October 2010 has only risen by around 138%, those who reinvested dividends along the way have gone on to earn an impressive 517% total return.
That’s the equivalent of a 12.9% annualised return, with dividends growing by a similar amount each year. In fact, ignoring 2020, where payouts remained flat, Legal & General has increased dividends every year since 2009.
Needless to say, that’s an impressive track record. And looking at the latest analyst forecasts, this hot streak could continue. Analysts are projecting 2025 full-year dividends to land at 21.79p, and then rise again to 22.23p in 2026. For reference, the payout in 2024 was 21.36p.
Digging deeper, this bullish sentiment appears to be driven by a combination of factors, including:
- Strong earnings growth – core operating profits across the first half of 2025 grew 6% to £859m
- Rising assets – workplace assets under administration jumped 7% to £101bn
- Strategic momentum – management’s selling its non-core US protection business while securing a new partnership with Blackstone to pursue new growth opportunities within the annuities and asset management markets
So far, it sounds like the passive income from Legal & General’s a sure thing. So why aren’t more investors capitalising on its index-leading dividend yield?
The elephant in the room
Operationally speaking, Legal & General appears to be in a strong position. But what investors are rightfully concerned about is the firm’s exposure to the UK gilt market.
A large chunk of profits is currently coming from the pension risk transfer market. But pension products can carry a lot of risk. So to hedge against this, Legal & General use UK gilts as a key pillar in its risk management strategy.
The problem is, if gilt yields suddenly rise, then this risk management strategy can backfire, triggering margin calls, putting pressure on the group’s solvency, and forcing asset sales at distressed prices.
With the UK government currently running a substantial fiscal deficit, a breach of its self-imposed fiscal rules could trigger a surge in gilt yields, starting a cascading effect that might decimate Legal & General’s profit margins. And with the Autumn Budget only a few short weeks away, investors are understandably on edge for the potential volatility that might be just around the corner.
With that in mind, I’m not rushing to buy Legal & General shares right now, even with the promise of impressive passive income. Instead, I’m looking elsewhere for lucrative investment opportunities.
