We’re now in the last month of the year. It’s natural to have one eye on 2026, especially when it comes to deciding where the stock market could head. When it comes to stocks for passive income, I think next year could be very important for yields, as I expect the Bank of England base rate to fall.
So I turned to my old friend ChatGPT to see if it had any wise words on what to consider.
A financial heavyweight
The AI bot pointed me towards Legal & General (LSE:LGEN), which it said was a real standout pick for next year. In terms of reasoning, it flagged that the dividend yield has historically been well above the FTSE 100 average. This is true, with the current yield being 8.75% in comparison to the 3.16% from the index average.
It also suggests that Legal & General has “long been viewed as a cornerstone for income-focused UK investors”. I’m not sure I agree entirely with this. The share price has been volatile in the past, leading some investors to stay away and look for other dividend shares with a steadier share price.
Despite ChatGPT picking a solid income stock, there are some points it failed to mention that I think need to be taken into account.
A high yield at a cost
Interestingly, the stock currently has the second-highest yield in the entire FTSE 100. This will undoubtedly make it attractive to investors looking to boost their portfolio yield for 2026.
The stock’s up 11% over the past year. However, it may be overvalued right now. For example, the price-to-earnings ratio’s 84.95. This is very high, and over four times the FTSE 100 index average. As a result, the share price could fall in 2026, making the valuation more reasonable. If this does happen, anyone who buys now could see the benefits of next year’s income eroded by the unrealised loss from the share price drop.
Further, the dividend cover’s currently 0.94. Any number below 1 means that the current earnings per share don’t fully cover the dividend per share. This isn’t a great sign, as it’s essentially paying out more than it’s making.
These are risks going forward, but it doesn’t mean I’d completely discount the company. At a fundamental level, the business model is diversified (insurance, retirement solutions, investment management), meaning multiple streams of cash flow support its dividend payments even if one part of the business faces a downturn.
On balance, I do think Legal & General’s a good dividend stock. However, I don’t think it’s the best passive income option to consider for next year across the entire stock market. I feel there are better options with lower yields but are potentially less overvalued.
