I’d buy 9,833 shares of Legal & General to target £2,000 of yearly passive income

Christopher Ruane explains how and why he might aim to earn thousands of pounds annually in passive income by buying Legal & General shares.

| 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.

A young woman sitting on a couch looking at a book in a quiet library space.

Image source: Getty Images

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.

One simple way to earn passive income is investing in blue-chip shares that pay dividends.

Not all shares make such payouts, even if they have done so before. But in any given year, well-known British firms distribute tens of billions of pounds of spare cash in the form of dividends. By owning their shares, I could benefit from this bonanza.

If I wanted to target £2,000 a year of passive income from the well-known financial services provider Legal & General (LSE: LGEN), here is how I would go about it.

Picking winners

Although in this example I discuss buying shares in only one company, that is because I already own shares in other businesses that pay my dividends. I would try to keep my portfolio diversified. That way, if one company cuts its dividend or experiences a share price collapse, the impact on my overall portfolio is reduced.

Why am I using Legal & General in this example?

Put simply, I see it as an attractive income share – and one I would be happy to buy if I had spare money to invest.

The business benefits from resilient demand for products like pensions, a well-known brand and large current customer base.

That has helped generate large cash flows the company uses to pay juicy dividends. The dividend yield is 8.2% and this week the company raised its annual dividend by 5% to 20.3p per share.

Setting up income streams

So, to aim for my target of £2,000 in annual dividends, I would need to buy 9,833 shares in the FTSE 100 financial services provider. At the current price, that would cost me around £24,400.

If I did that, I ought to earn £2,000 in dividends per year.

In fact, I could earn more. In most recent years the company has raised its annual dividend (2020 was the exception and that year it was held steady). Over the past four years, the firm has distributed £4.5bn in dividends. Even on top of that, though, it has generated net surplus cash of £0.8bn.

The dividend could keep going up, if the business performs well. That could make it even more attractive from a passive income viewpoint.

Looking ahead

Will it happen though?

Earnings per share last year were sharply lower than the prior year. That was largely driven by investments varying in their return, a risk that is ever-present for a pensions provider.

In a competitive market like pensions, there is also an ongoing risk that new entrants or existing rivals will cut prices, putting pressure on profit margins.

But I see Legal & General as a proven operator. It has multiple strengths and last year proved yet again that it can generate substantial spare cash and fund a beefy dividend.

That is the sort of passive income idea that grabs my attention!

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.

More on Investing Articles

Investing Articles

With a P/E ratio of 9, is the Aviva share price a bargain?

Christopher Ruane looks at the Aviva share price and considers some strengths and weaknesses of the FTSE 100 insurance business.

Read more »

Surprised Black girl holding teddy bear toy on Christmas
US Stock

Is it too late to buy growth stock Shopify after its 25% pop?

Up more than 40% this year, Shopify is on fire at the moment. Here, Edward Sheldon explains how he’d play…

Read more »

Investing Articles

Investors should consider buying this energy AIM stock, up 50% in the past year

AIM stock Afentra has seen a stellar price rise in 12 months to November. I believe there may be room…

Read more »

Investing Articles

2 ISA shares to consider for a large passive income!

Looking for dividend shares to buy in a Stocks and Shares ISA or Lifetime ISA? Royston Wild reveals two of…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

A Bitcoin investment that can be held inside a Stocks and Shares ISA or SIPP

UK investors can’t buy Bitcoin ETFs for their investment accounts or SIPPs due to FCA regulation. This stock could be…

Read more »

Entrepreneur on the phone.
Investing Articles

As the Vodafone share price slides 6% on lacklustre H1 results, what does the future hold?

After posting moderate results this morning, Vodafone saw its share price sink further, erasing this year's gains. Our writer looks…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing For Beginners

If I’d invested £5k in a FTSE tracker fund after the pandemic crash, here’s what I’d have now

Jon Smith explains the extent of his potential gains if he'd invested in a FTSE tracker fund during the Covid…

Read more »

Investing Articles

2 top shares I’ve bought for my Stocks and Shares ISA in November

This writer reveals a pair of fast-growing businesses that he's recently added to his Stocks and Shares ISA for the…

Read more »