I always like to keep an eye on the UK’s favourite passive income shares. One way I can do this is to take a peek at what Britons are buying in their Stocks and Shares ISAs. Brokers such as AJ Bell or Hargreaves Lansdown release the data from time to time, showing us what the most popular picks are!
One name I see in almost every top 10 list is Legal & General (LSE: LGEN). Why so much buzz about this stock? The retirement and wealth management specialist is known for one of the highest dividend yields, along with the kind of stable revenues that could see the passive income rise long into the future
How much income?
How much are Legal & General shares changing hands for at the moment? On the day I write this, you’d need to fork out 270p for a single share. The forecast dividend (over the next 12 months) is 22p which means, all being well, you would expect to receive an 8.22% return in a year.
A £10,000 stake would require 3,703 shares and could return £822 yearly passive income.
That, we hope, is only the start of it, of course. The real magic to investing in dividend stocks is to find a company capable of growing dividends as the years go on. That means even if we’re withdrawing our dividends as passive income (rather than reinvesting them) we can still see the income go up over time.
For example, Legal & General’s booked an average 4.98% growth rate in dividends over the last decade. If that trend continues, then the dividend yield (on the original investment) would be 9.98% in five years time and 12.73% in 10 years time. Although it should be said that dividends are never guaranteed and the company may struggle to sustain an above-average growth rate.
What I think
Let’s put the brakes on a second. Being the highest dividend on the FTSE 100 positions the stock in the danger zone. You may remember Vodafone offering a 12% yield a couple of years ago? That dividend was unsustainable and the firm slashed it. Anyone buying in dreaming of double-digit returns over the long haul is now looking at a middling 3.36% yield.
Is that the case for Legal & General? One point of concern is the dividend cover which at 0.96 is slightly below the one benchmark. That means in the last financial year the company paid out more in dividends than it made in profits.
While that’s a problem in the short term (or if it keeps happening), the future looks brighter for the company. Earnings are set to increase in the years ahead which should, if the forecasts are accurate, push the dividend cover into safer territory.
On balance? I’m not surprised that Legal & General’s a beloved passive income stock for so many. I too think it’s worth considering.
