With so many dividend stocks listed on the London Stock Exchange, we’re spoilt for choice. But one company that investors across the country are seemingly rushing to buy is Legal & General (LSE:LGEN).
The life insurance and asset management business has a long track record of rewarding shareholders with dividends. In fact, when excluding the pandemic, Legal & General has raised shareholder payouts every year since 2010. And this trend has translated into the business having the highest yield in the entire FTSE 100 today at 8.6%.
With that in mind, it’s no wonder many investors see it as a top stock to buy. But I’ve spotted something that makes me nervous…
Impressive potential
Looking at the UK’s demographics, there’s an enormous incoming wave of retiring baby boomers, many of whom will soon be seeking pension and retirement solutions. And as interest rates steadily fall alongside inflation over the long run, the group’s asset management arm looks also primed to thrive, riding the tailwinds of rising equity valuations.
Of course, Legal & General isn’t the only business aiming to cash in on these potentially enormous tailwinds. However, one major advantage versus many of its peers is the group’s international exposure.
With its presence in the US as well as UK markets, the business is able to tap into multiple market opportunities to maximise its growth. And with that in mind, it’s not hard to understand why some investors see Legal & General as a mispriced quality compounder.
But this is where things get complicated…
Pressures on profits
While the group delivered a robust 9% expansion of core operating earnings in 2025, this growth was still insufficient to close the gap between profits generated and dividends paid.
Management’s internal forecasts suggest this is only a temporary problem, with dividend coverage being restored by 2027. But there are two primary issues with this projection:
- It assumes that the market doesn’t suffer a major downturn.
- It assumes that competition doesn’t eat away at profit margins.
Following the outbreak of war in Iran, the OECD has warned the UK is at risk of a major economic hit on the back of skyrocketing energy prices. And even in the US, economists and institutional analysts have increased their estimated odds of a potential recession.
Admittedly, this is a worst-case scenario. But even if the UK and US economies manage to avoid disaster, there’s still the question of rising competition.
With multiple insurance groups looking to cash in on the ongoing annuities gravy train, Legal & General is having to price more competitively, pressuring its profit margins to capture volume. And if competition continues to intensify, management could end up falling short of its targets.
That’s why multiple institutional analysts have started flagging Legal & General’s dividend as at risk of a cut.
The bottom line
If management is able to hit its promised performance targets, Legal & General shares are likely undervalued today. But given the macroeconomic backdrop, that’s a big if. And the risk of a payout cut is very real.
That’s why, despite its popularity, I’m not in a hurry to buy the shares today. Instead, I’m looking at other promising dividend stocks that offer a far more attractive risk-to-reward ratio.
