There are plenty of ways to earn a second income. I could take on a second job, rent out a spare room, or invest in the stock market. The latter is my favourite option.
With that in mind, today I’m looking at Legal & General (LSE:LGEN) — a British insurer paying a huge 9.3% dividend yield — and working out how many shares I’d need to achieve £2,000 a year in passive income.
The basics
Investing in stocks for a second income is simple. The simplicity of stock investing lies in the fact that it’s accessible to almost anyone, and it doesn’t require an extensive background in finance.
I can simply open an investment account, perhaps using the tax-efficient ISA wrapper, and invest in dividend-paying stocks.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
However, simplicity doesn’t mean it’s a guaranteed path to success. It’s essential to recognise that stock investments come with inherent risks, and success often requires careful planning, research, and a long-term commitment.
The dividend
Legal & General has a 9.3% dividend yield that was covered two times by earnings in 2022. This is a huge yield, more than double the index average.
So, at this moment in time, I’d need £21,500 worth of Legal & General shares to earn £2,000 in dividends each year. At the current share price, I’d need 10,238 shares in the insurance giant to make this work.
Of course, not all of us have the capacity to invest £21,500 in a single stock. As investors, we should aim to build diversified holdings.
Personally, I have a large holding in this dividend giant, but it’s proportional to the overall size of my portfolio.
It’s worth remembering, however, that Legal & General rarely engages in share buybacks that would enhance the company’s share price.
This means the insurer returns value to its shareholders in the form of dividends and doesn’t mean the share price won’t rise.
In fact, there are several tailwinds supporting the company’s performance, its strong dividend, and potential share price growth in the short, medium, and long term.
More than just a dividend
Legal & General is a fundamentally strong company and there’s reason to believe performance will improve over the medium term.
Firstly, it’s worth noting that with interest rates peaking, we should see the end of capital outflows and falling assets under management (AUM). Overall AUM fell by £132bn to £1.158trn during the first half of the year alone.
There’s a simple rule with interest rates and investments. When interest rates rise, capital tends to move from stocks to cash and debt.
This broadly explains why Legal & General’s investment arm (LGIM) has underperformed, and why it could outperform in a moderating interest rate environment.
However, if interest rates remain high, this could be a continued drag on LGIM.
Secondly, I’m looking at trends in bulk purchase annuity (BPA) as a major tailwind. Legal & General BPAs in the UK, which are insurance contracts used by pension schemes to transfer future pension payment liabilities to an insurance company.
In 2022, L&G dominated the BPA market, accounting for 26% of the market share and overseeing the two largest deals of the year.
The BPA market has seen substantial growth, increasing from £10bn in 2016 to over £50bn in 2022, with the potential to reach £100bn by 2030.
