A dividend yield creeping above 8% is often a warning sign of a dividend about to be reduced or cancelled, but not so with Legal & General (LSE: LGEN) shares. The pension provider has been a regular name at the top of the FTSE 100 dividends leaderboard for years. Its 8.81% return over the last 12 months gives it the number one spot as I write!
For anyone looking for the biggest cash return, Legal & General might seem a no-brainer buy. But are there hidden dangers here for dividend hunters? Or is this big-paying company as good as it first appears?
Good signs
A high dividend yield can be a sign of success, but we must remember that we aren’t buying the yield itself. We’re not just buying the stock, for that matter. We’re buying into the company, its operations and its people.
The question to ask: is the company well-suited to pay such big dividends over the long run? I think the answer here is yes.
Legal & General draws much of its revenue from pensions. This is a growing market as the UK gets older and people are living longer. Just this year, the average life expectancy in Britain passed 82 years old for the first time.
The company are aiming to take advantage of this trend by shifting towards ‘fee-based earnings’ which are more predictable and less capital intensive. The goal is for 40% of Retail profits to be fee-based by 2034, up from 15% in 2024.
Consistency and predictability is exactly what we want when it comes to dividends. And Legal & General has it in spades. The firm has increased dividends almost every year this century. Of course, any company can cut dividends. Unforeseen crises can lead to a cancellation like the pandemic did.
Years ahead
As far as negatives go, it’s hard to ignore the stagnant share price. Ideally, we want to see growth in the share price along with those dividends. Analysts are somewhat downbeat in this regard with only two Buys among those covering the stock. The share price being stagnant since 2014 does not bode well, either.
On the other hand, forecasts expect dividends to rise in each of the next two years. By 2027, the dividend yield could grow to around 9.2% without any reinvesting. A growing dividend, paired with reinvesting each payment, can slowly build passive income over time. Given a few years of compounding, my effective yield could be much higher in the future.
What might a stake return in the next year? Buying 777 shares would cost £1,878 at the outset. That same stake would return around £170 in the coming year based on forecasts. With a little bit of luck that could just be the start of a slowly rising return year on year, too.
