Investors in Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US) have had a fantastic five years! Not only have shares outperformed the FTSE 100, they have risen five-fold since the current bull market began in March 2009. That’s well ahead of the FTSE 100’s not inconsiderable return of 73% over the same time period. However, is Legal & General now overpriced as an income play? Or is it still a super income stock?
A Top Yield
Despite the vast share price rise in recent years, Legal & General remains a great-yielding stock. Its yield is currently 4.4%, which is well above that of the FTSE 100 at 3.5% and considerably higher than inflation and a typical high-street savings account. However, the yield could go even higher, since Legal & General is relatively conservative when it comes to paying dividends to shareholders.
For example, the company’s dividend payout ratio in 2013 was just 61%, meaning 39% of profits were retained within the business to stimulate future growth. However, since Legal & General is a mature company operating in a mature industry, it could afford to be more generous and pay a greater proportion of earnings out as a dividend to shareholders. Indeed, a level between two-thirds and three-quarters of profit could be sensible and still leave sufficient capital to keep in the business for future growth. Doing so would mean a higher income for shareholders of the company.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Of course, that’s not to say that dividends are not going to grow much in future. Quite the contrary, in fact, since dividends per share are forecast to increase at an annualised rate of 13.6% over the next two years. This is well-ahead of the FTSE 100 average and means that Legal & General could be yielding as much as 5.6% in 2015 (assuming the share price stays where it is).
Looking Ahead
Trading on a price to earnings (P/E) ratio of 14, Legal & General seems to be fairly attractive considering the yield it offers. While the FTSE 100 has a lower P/E of 13.5, Legal & General is expected to deliver a brisk pace of dividend per share growth, with the scope for even more if the payout ratio is increased. As such, it still looks to be a great income play and a super income stock.
