The Legal & General dividend forecast has grabbed my attention!

Christopher Ruane explains why the Legal & General dividend forecast makes him want to own the FTSE 100 share in his portfolio.

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As a former investor in financial services giant Legal & General (LSE: LGEN), I have certainly appreciated the firm’s juicy dividends in the past. At the right share price, I would be happy to add Legal & General back into my portfolio.

Lately I have been looking at the business prospects and Legal & General dividend forecast as part of my research into the firm.

Should I buy?

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Dividend policy

The company is fairly unusual in that it sets out a clear plan of what it intends to do with its dividend.

From 2021, that was to grow the dividend annually at low to mid single digits in percentage terms. The company’s stated ambition was for earnings per share to grow quicker than dividends.

If it succeeded in doing that, dividend coverage by earnings would grow. But earnings per share can move around for any company, so even if they fall one year, I still expect Legal & General to try and stick to its policy of modest dividend raises.

In each of the past two years, the company has delivered a 5% annual dividend rise.

Increases expected

Dividends are never guaranteed though. Indeed, Legal & General failed to raise its payout in 2020 and cut it in the last financial crisis. How optimistic ought investors to be about the outlook now?

The dividend was covered around two times over by earnings last year. I see that as a decent level of coverage. With a dividend yield of 8.6%, the shares certainly grab my attention.

In line with the policy, I expect an annual dividend increase of around 5% in each of the next couple of years. If that Legal & General dividend forecast turns out to be correct, it means that the prospective dividend yield a couple of years from today is 9.5% at the current share price.

Should I buy?

That high yield from this blue-chip FTSE 100 member certainly grabs my attention!

But the share price performance is a concern for me. Over the past five years, the shares have lost 19% of their value.

So although the Legal & General dividend forecast tempts me, could I end up seeing some of the value of my potential investment destroyed by a falling share price?

Created with Highcharts 11.4.3Legal & General Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

I think that could happen. Clearly the company, which is highly profitable, is not popular with all investors. But I think the share price fall actually makes Legal & General more attractive to me. It means the company now trades on a price-to-earnings ratio of just 6.

I think that looks cheap. The firm is highly profitable, has a strong brand, benefits from a large customer base and operates in a sector with high demand. I do see risks. Turbulent stock markets could cut returns, for example, hurting profits.

But the risk-to-reward ratio here looks good to me. If I had spare cash to invest, I would add the company back into my portfolio at its current price.

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

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.

C Ruane 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.

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