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.

Should you invest £1,000 in Hollywood Bowl Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Hollywood Bowl Group Plc made the list?

See the 6 stocks

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.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

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

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »