What can £20,000 get someone in the stock market? It is certainly enough to help them buy into the FTSE 100 index of leading blue-chip shares, for example through a tracker fund.
Alternatively, they could buy individual FTSE 100 shares.
It is always important to keep a portfolio diversified, but as part of a bigger investment portfolio, what sort of income might an investor earn by putting £20,000 into the index’s current highest-yielding share?
A well-known name – and well-received dividend yield
At the moment, that crown is held by financial services firm Legal & General (LSE: LGEN).
With its yield of 9%, the share is several times more lucrative in terms of dividends than the wider FTSE 100 index, currently offering a yield of 3.2%.
Many investors appreciate such a yield from a well-known and long-established dividend share.
It is therefore no surprise that Legal & General is in the portfolio of many small investors (and large ones) for whom passive income in the form of dividends is important.
Here’s what £20k gets an investor
At it current share price of around £2.43, £20k would be enough to buy about 8,230 shares in Legal & General.
Currently the annual dividend per share is 21.79p. So those 8,230 shares ought to earn the shareholder roughly £1,793 per year in dividends. That strikes me as excellent.
Not only that, but the firm aims to grow its dividend per share annually by around 2%. That is less than the 5% annual growth it was offering until recently, but it still means the prospective yield could be even bigger than the current yield of 9.0%.
Say the dividend does keep growing at 2% annually, for illustration purposes. The current annual dividend income of £1,793 would then grow to £1,980 five years from now and around £2,186 a decade from now.
Can the dividend last?
But is that illustration likely to be realistic? Will the dividend last?
No shareholder payout is ever guaranteed. Indeed, Legal & General cut its dividend per share in the midst of the 2008 financial crisis, although it has long since surpassed the level it was at before that cut.
Earnings at the firm have fallen in recent years, compared to just a few years ago. The recent sale of a large US business will likely take a chunk out of recurring revenues and possibly also earnings.
So, it could be that the slowing annual growth rate for the dividend in recent years presages more bad news ahead in years to come.
However, that might not happen.
Legal & General has proven its ability when it comes to generating cash flows that can help support a substantial dividend. A measure of that is what is known as Solvency II capital generation. Last year, Legal & General grew that 5% to £1.5bn.
With a share price decline of 14% over the past five years – a period that has seen the FTSE 100 grow in value by 50% — Legal & General’s board ought to be acutely aware of how important maintaining and ideally growing the dividend is to the share’s investment case.
The company’s strong brand, large long-term client base and proven operating model all give me confidence it can keep doing well over the long run.
I see this as an income share for investors to consider.
