I’ve just invested £1k in Legal & General (LSE: LGEN) shares and the first thing I did was kick myself for not buying more. I plan to put that right though.
The obvious charm of buying Legal & General is its mighty dividend yield. The shares are forecast to deliver income of 8.8% over the next year, nicely covered 1.7 times by earnings. That’s one of the best yields on the FTSE 100.
It’s a top income stock
There’s a danger in going flat out for maximum income, as I’ve discovered. I bought Rio Tinto last autumn when it was yielding 11%, but soon after management slashed the dividend in half.
That’s hardly the end of the world. Its shares are still up since I bought them, and today’s yield is a handsome 7.75%.
Could L&G do the same? Personally, I think its dividend looks stronger, as the group posted a 12% increase in full-year 2022 operating profit to £2.52bn. Management felt able to increase its dividend by 5% to 19.37p per share and has ambitions to keep the cash flowing to shareholders reporting “strong dividend headroom”.
Cash generation of £5.1bn and capital generation of £4.9bn are expected to climb to between £8bn and £9bn by 2024. By then, today’s £3.3bn dividend total should range from £5.6bn to £5.9bn, with £700m net surplus generation on top. I like the sound of that.
Legal & General boasts a “strong and highly resilient” balance sheet, with a record solvency II coverage ratio of 236% (up from 187%). Dividends are never guaranteed, of course, and can be cut or abandoned at any time. Yet L&G kept the income flowing during the pandemic and is increasing payouts slowly but steadily.
It isn’t firing on all cylinders. Its investment arm, Legal & General Investment Management, was hit by recent stock market volatility, with assets under management falling £225bn last year. That hit percentage-based management charges, and profit fell from £422m to £340m. With luck, it should make good much of those losses when the stock market recovers.
Not much growth
L&G trades at just six times earning. That seems low but its shares have done poorly. They’re down 15.26% over five years and 8.64% over 12 months. The income is the selling point here.
So how many L&G shares do I need to generate my £100 monthly income target? Based on the 2022 dividend of 19.37p, I’d need 6,195 shares.
At today’s share price of 229.8p that would cost me £14,218. Clearly, my £1k stake leaves me well short of that. Even if the yield jumps to, say, 20p, I can only look forward to income of £87 a year from my 438 shares. That’s £7.25 a month. I said I didn’t buy enough of them!
I’m currently transferring an old company pension scheme into a self-invested personal pension (Sipp), and this should give me a lot more financial firepower.
My portfolio isn’t big enough to invest £14,000 into one stock, but I’d like to up my L&G stake to £5,000. That will give me income of £36.25 a month, which should rise over time if management hits its targets.
