Like a lot of investors, one of my reasons to own shares is the passive income streams they can generate. So I am always keeping an eye out for attractive dividend shares I could add to my portfolio. One that has caught my attention is insurer Legal & General (LSE: LGEN). Here are three things I like about the Legal & General dividend yield.
1. The yield is 7% — and rising
Over the past year, Legal & General shares have drifted downwards, losing 3% of their value. So far in 2022, the fall has been more dramatic. The shares are down 17%.
That might sound like bad news from an investment perspective. But dividend yield relies both on what a company pays out and also how much I pay for its shares. So the current share price means that if I invest in Legal & General today, I will be looking at a prospective yield of 7%. I find that very attractive.
Not only that, but I expect the future yield to rise. Although dividends are never guaranteed, the financial services powerhouse has set out plans to increase its annual dividend in coming years. If it is able to deliver on that plan, I expect to see a future dividend yield above 7%, if I buy at the current share price.
2. Strong moneymaking capability
How can a company pay dividends? Basically it needs to make profits to do so.
That is one of the things I like about Legal & General. Its iconic brand, long history, strong reputation, and deep experience in providing financial services give it a solid basis for continued success. The company is a moneymaking machine.
Last year, it reported profits after tax in excess of £2bn. Yet its market capitalisation is only around £15bn. That means its price-to-earnings ratio is low, offering what I think is excellent value for my portfolio. It also underlines the power of the company’s business model.
That does not mean there are not risks. For example, insurance policy renewal pricing regulation could lead to smaller profit margins. A financial downturn might also lead customers to withdraw investments, hurting revenues and profits. But with my focus on long-term investing, I think the company’s business strengths provide a strong foundation for the Legal & General dividend.
3. The Legal & General dividend yield is well-covered
Just because a business makes big profits, however, does not always mean it can afford large dividends. For example, it may have a huge number of shares in circulation, meaning that the earnings per share are quite low.
Fortunately, that does not worry me about the Legal & General dividend. Last year, the firm’s basic earnings per share were 34.2p. That comfortably covered the dividend of 18.5p per share. In fact, there is a sizeable buffer there. Even if earnings per share fall (they were only 22.1p the previous year, for example), the Legal & General dividend could still be covered depending on the size of the decline.
With its 7% yield right now, it is one dividend share I would happily consider for my portfolio.
