Legal & General (LSE: LGEN) is one of the highest dividend payers in the FTSE 100, with a yield of around 7%. But unlike some other dividend stocks, which are seeing a slowdown in growth, Legal & General is also managing to grow profits. So, let’s take a further look at why this stock makes up a large part of my portfolio.
Today, LGEN released a very positive half-year trading update. It announced that operating profits were over £1bn, up 14% from last year. Yet more importantly, this figure was up over 7% from the same period in 2019. This demonstrates that its financial performance is now well-above pre-Covid levels as well. Despite this, the share price is still 15% lower than its peak of last February. Personally, I feel that this does not reflect the excellent results the company has managed to achieve.
Furthermore, the future looks bright for this FTSE 100 stock, and it expects that it can deliver double-digit growth in operating profits for the whole of 2021. This should be aided by the company’s synergistic business model, which includes exposure to pension de-risking and asset management. In the long term, the ageing population is expected to fuel growth, especially in the annuities sector. Accordingly, the company has significantly more to it than just the dividend.
Even so, the main reason I own Legal & General shares is due to the dividend. This has seen extraordinary growth over the past few years, cementing the insurance company as one of the largest dividend payers in the FTSE 100. In fact, in 2010, the full-year dividend totalled just 4.75p per share, in comparison to 17.57p last year. It is also continuing to grow, and in today’s trading update, the interim dividend was raised by 5%. Clearly, this makes LGEN stand out among other FTSE 100 stocks.
The dividend also looks sustainable, which is key for any large dividend payer. This is because it is well-covered by earnings. The firm is also aiming to grow the dividend by low-to-mid single-digits per year, while earnings per share are hoped to grow at a quicker pace. This shows that LGEN is still prioritising growing the business, and the large dividend is not detrimental to this.
Should I add more of this FTSE 100 stock to my portfolio?
Although I see LGEN in a very positive light, there are risks I must take into account too. For example, the share price is heavily correlated with the UK economy. As such, if the economic recovery starts to slow down, this is likely to have a negative impact on the company. The insurance sector is also highly competitive, and while L&G is currently a market leader, there is always the risk of new and innovative companies taking market share.
But I feel that the positives of this stock far outweigh these risks. The 7% dividend yield is also too tempting for me to ignore. This means that I’ll probably add more of its shares to my portfolio soon.
Stuart Blair owns shares in Legal & General. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.