Legal and General (LSE: LGEN) shares offer the highest rate of dividend income on the entire FTSE 100. Today, the trailing yield is a stunning 8.6%. At times in recent years, it’s touched double digits. Is that reason enough to buy?
Many investors can’t resist. The insurer and asset manager is one of Britain’s most bought blue-chips. I couldn’t resist myself, adding it to my SIPP in 2023. But there’s a catch. A sky-high yield is often the sign of a struggling share price, and that’s the case here. What investors have gained in income, they’ve sacrificed in growth.
Top FTSE 100 income stock
Some may be happy with that. If they’ve retired, and are drawing Legal & General’s juicy dividends as income, what happens to their capital may be less of an issue. Provided the income remains sustainable.
Even younger investors in the wealth-building phase may be content. Reinvested, that 8.55% yield would turn £10,000 into £22,714 over 10 years, even if the shares don’t grow at all. If they grow at an average of 3% a year, the total return would hit £29,833.
It’s worth pointing out that by targeting a high yield, investors are implicitly accepting lower growth. Every time the shares go ex-dividend, which in this case is twice a year, the share price falls to reflect the lost capital value of those shareholder payouts. When the yield is this big, the shares can fall markedly.
We’ve just had a good example of that. FTSE 250 housebuilder Taylor Wimpey now yields just over 11%. It went ex-dividend yesterday, and the shares fell 4.5%. Something similar will happen when Legal & General goes ex-dividend on 23 April.
Dividends and share buybacks
Yet high-income shares can still deliver growth. Wealth manager M&G and insurer Standard Life (formerly Phoenix Group) have both yielded close to 10% in recent years. Their shares are up 43% and 30%, respectively, over the last 12 months (they were doing better before the Iran-linked correction).
Legal & General shares have also climbed, but nowhere near as much. They’re up a modest 4.3% since the start of the financial year on 6 April 2025. Add in the trailing yield, and the total return is 12.9%. This would have turned £10k into £11,290. That’s not great, but given the recent correction, it’s not bad.
Long-term performance is worrying. The shares are down 10% over five years, and only a fraction above where they were a decade ago. Yet the dividend has been solid throughout. It’s risen every year since the financial crisis, with the exception of a freeze during the pandemic in 2020. The average annual compound growth rate is 10.7% over the last 15 years. However, future growth may be lower at 2%.
Last month, Legal & General also announced a record £1.2bn share buyback. It expects to return more than £5bn to shareholders between 2025 and 2027. Of course shareholder returns aren’t guaranteed, and the group is vulnerable to further stock market falls, which would hit the £1.2trn of assets it has under management.
I still think it’s worth considering for an income-focused investors, as part of a balanced portfolio. Who knows, we may see some price growth as well.
