Legal & General (LSE: LGEN) shares are a magnet for income seekers, and with good reason. Only one FTSE 100 stock yields more, but that’s a company I wouldn’t touch with a bargepole today.
Advertising giant WPP offers an eye-popping trailing dividend yield of 10.5%. However, investors won’t get that because the board just halved the dividend after a 70% slump in half-year profits.
Legal & General has a sky-high trailing yield of 8.9% but there’s a key difference. Barring surprises, I think it looks sustainable. And there’s something else to admire.
A rare premium
I’ve just been looking at AJ Bell’s latest dividend dashboard and it made an interesting point about something called the risk-free rate. This measures the return investors can get without putting their capital at risk, say, from cash or bonds. It used the 10-year gilt yield as a proxy. Back in September, it stood at 4.65%. At that point Legal & General had a forecast yield of 9.3%, almost exactly twice the risk-free rate. It was the only FTSE 100 stock to do that. Pretty impressive.
Today (26 November) the 10-year gilt sits at 4.49%. Legal & General would need a forecast yield of 8.98% to double that. It actually yields slightly more at 9.05%. Aside from WPP, it’s still the only blue-chip to clear that threshold.
By contrast to cash and bonds, there’s also the chance of capital growth on top if the share price powers on. Last year, the Legal & General share price climbed a modest 8%, lifting the total return, including the trailing yield, close to 16%. Sadly, the longer-term share price story is underwhelming. It’s down 7% over five years, so dividends have done all the work lately.
Dividends and buybacks
Legal & General’s valuation doesn’t look particularly stretched with a forward price-to-earnings ratio of 13.9. Analysts expect the yield to hit 9.22% in 2026, although nothing’s guaranteed. The dividend cover figure is just 0.84 times earnings, which worries me. I’d prefer a figure closer to two. Could it be cut at some point?
The group has increased its dividends every year since 2010, with the sole exception of the pandemic year of 2020, when it froze payments (many blue-chips cut). Annual compound growth rate over the last 10 years is a robust 6.17%. Management plans to return another £5bn through dividends and share buybacks over three years. That doesn’t suggest anxiety about sustaining shareholder rewards.
Income resilience
Legal & General has to keep generating the cash to support its shareholder distributions. The balance sheet looks firm though, with a Solvency II ratio of 232% in 2024, up from 224% in 2023.
A trading update on 23 October predicted full-year 2025 core operating earnings per share should land at the higher end of its 6%-9% target range, with surplus generation growing more than 3%. Risks remain though. It operates in a competitive market, while with £1.1trn of assets under management, it would be hit by a wider stock market crash.
Investors might consider buying for the yield alone. Any share price growth should be treated as a bonus. Other high-yield FTSE 100 stocks have delivered better capital returns, so investors might want to check them first.
