I’ve been looking at the huge 9% dividend yield forecast from Legal & General (LSE: LGEN), and wondering what kind of second income it might help secure for me.
Right now, it’s the biggest from any FTSE 100 stocks — though I count 15 with more than 5% on the cards for the current year. There’s a bit of diversify too, including Barratt Redrow on 6.7%. And there’s 7.6% on offer from investment specialist M&G. It all makes me think this is a great time to be building up a passive income portfolio based on high-yield dividend stocks.
But let’s get on to Legal & General and see what that might be able to contribute.
Dividend vs share price
The immediate disappointment is the share price. That doesn’t actually matter much for investors who aren’t planning to sell but instead just keep taking the annual cash. There may be room for some growth there over the next five years and more. But let’s be conservative and just go on the dividend for now.
Putting £500 each month in Legal & General shares over 20 years would add up to a total of £120,000 invested. But at a 9% annual rate of return, it could build up to a bit more than £320,000 over that timescale. And the same 9% could then generate an annual second income of £28,900 — or £2,400 per month.
Would I put this amount of cash into one stock? No, I’d see it as way too risky. For one thing, dividends aren’t guaranteed. And the insurance business is typically cyclical over the long term. Any company or sector can be hit by hard times too. Just ask anyone heavily invested in banks back in 2008.
Diversified income
That’s why diversification is, in my view, an absolute essential for any long-term investor. But how realistic might this example of Legal & General actually be?
Well, the average Stocks and Shares ISA return over the past 10 years has come out at 9.6%. That’s a bit higher than I’d expect the very long-term to turn out. But it shows that dreams of second income returns like this really can be based in reality.
The key is to keep investing as much as we can, and be sure to reinvest all of our annual dividends. Remember, my Legal & General calculations cover the dividend only — any share price gain over the next 20 years would add to the total. Saying that, I’m not sure I actually expect much from the share price. It’s in a risky sector that has had its share of ups and downs — and I don’t see that changing.
Build a portfolio
It’s important to not get too heavy on one sector, and there are plenty of other income stocks to help keep a balance. But I do think investors who can manage that balance, and who don’t mind the short-term uncertainty, could do well to consider Legal & General.
