Should investors buy Legal & General shares for the big dividend?

Legal & General shares sport a very attractive dividend yield. Is this an opportunity or a trap? Edward Sheldon takes a look.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Legal & General (LSE:LGEN) shares offer one of the highest dividend yields within the FTSE 100 index. At present, the prospective yield here is around 7.5%.

Are the shares worth buying for this big dividend yield? Let’s take a look.

Is L&G a dividend trap?

A high yield can sometimes be a trap. Often, it’s because there’s something fundamentally wrong with 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!

Get your free passive income stock pick

And what’s happened is that the ‘smart money’ has offloaded the stock, pushing its share price down and the dividend yield up, temporarily. The company then cuts its dividend, and the yield comes back down. We see this sequence play out all the time.

Looking at Legal & General however, I’m not convinced that there’s anything fundamentally wrong with the company.

Sure, there was some uncertainty a few months ago, during that mini budget crisis. This event led to clients selling higher fee products to meet collateral requests.

However, it said in November that this will only impact 2022 profits by around £10m. It also said expectations for its overall full-year profit and capital generation remained unchanged.

Looking ahead, the FTSE 100 company looks well-placed for growth. Legal & General is a major player in the bulk annuity space (this is an insurance policy purchased by a defined benefit pension scheme to offload risk) and 2023 is expected to be one of the biggest years on record for this type of insurance.

Meanwhile, in the long run, the company – which has built up a formidable investment management business in recent years – should benefit as global equity markets rise over time.

So, overall, there’s a lot to be optimistic about here.

Dividend track record

Zooming in on the dividend, this is expected to be well-covered by earnings in the near term.

For 2022, analysts expect Legal & General to pay out 19.4p per share from earnings per share (EPS) of 34.2p. That equates to dividend coverage of around 1.8 times.

And for 2023, analysts expect a payout of 20.5p per share on EPS of 34.5p. That gives dividend coverage of around 1.7 times. Generally speaking, a dividend coverage ratio close to two indicates a low chance of a dividend cut.

It’s worth noting here that Legal & General has put together a great dividend growth track record recently. The company hasn’t cut its dividend since the Global Financial Crisis of 2008/2009. And over the last decade, it has increased its payout significantly.

This gives me confidence that the dividend is secure in the medium term (although there’s no guarantee it is).

Attractive valuation

As for the valuation, the shares appear to offer some value right now. Given that analysts forecast EPS of 34.5p for 2023, the forward-looking price-to-earnings (P/E) ratio is less than eight. That’s an undemanding multiple.

This combination of a low valuation and a high yield looks quite compelling, to my mind.

Of course, there are risks to consider. One is share price volatility. Legal & General shares have a ‘beta’ of around 1.7. This means that they are around 1.7 times as volatile as the broader UK market. In other words, if the UK market was to fall 10%, its shares would most likely fall around 17%.

Overall though, I believe the shares currently offer an attractive risk/reward proposition.

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any of the shares mentioned. 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.

More on Investing Articles

Businessman hand stacking up arrow on wooden block cubes
Investing Articles

5 AIM stocks to consider buying for the long term

We asked our writers to share their best AIM-listed stocks to consider buying, featuring five very different businesses.

Read more »

Road 2025 to 2032 new year direction concept
Investing Articles

Is the Rolls-Royce share price still undervalued in 2025?

After massive growth in the Rolls-Royce share price, Charlie Carman considers whether the FTSE 100 aerospace and defence stock is…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

How an investor could target a £43k lifelong passive income starting with just £5 a day

Harvey Jones says it's possible to build a high-and-rising passive income by investing small, regular sums in FTSE 100 shares.…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

£10,000 invested in Lloyds shares on 7 April is already worth…

After a dip in early April, Lloyds shares are back to their 30%+ year-to-date gain in 2025. And analysts are…

Read more »

Tariffs and Global Economic Supply Chains
US Stock

What I’d look to buy as the US stock market heads for the worst month since 1932

Jon Smith sifts through the US stock market to try and find some ideas that have fallen in value recently…

Read more »

Businessman hand stacking up arrow on wooden block cubes
Growth Shares

Prediction: I think £1,000 invested in this UK stock could double by 2030

Jon Smith runs through a FTSE 250 stock with a market cap just over £1bn that he feels has the…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

With £10k in savings, here’s how an investor could target a second income of £500 a month

£10k in savings could be the foundation needed towards a powerful second income. Our writer details some steps necessary to…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing For Beginners

£1k invested in the FTSE 100 on ‘Liberation Day’ is now worth…

Jon Smith talks about the volatility in the FTSE 100 in the weeks since the tariff announcements and flags up…

Read more »