I think the best passive income stocks are the ones that are likely to pay above-average dividends for a sustained period of time.
And since 2019, Legal & General (LSE:LGEN) has been doing just that. During this period, it’s increased its payout every year — except in 2020, when it was unchanged due to the pandemic.
For the year ending 31 December 2024 (FY24), it’s intending to pay 21.36p a share. In cash terms, this is more than 4.5 times higher than its dividend for FY09.
Should you invest £1,000 in Legal & General right now?
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Impressively, the average annual increase since 2015 has been 8.3%.
And with a current (18 October) share price of 230p, this implies a yield of 9.3%. This is comfortably above the average for the FTSE 100 of 3.8%.
But an increasing dividend and a stagnant (or falling) share price will push the yield higher. Of concern, in October 2015, the financial services provider’s shares were changing hands for 7% more than they are today.
However, as the chart below shows, even taking into account the disappointing share price performance, the stock has always yielded at least 4.5%, since 2015.
Looking to the future
But the company’s warned investors that the dividend is only going to increase by 2% a year through until FY27.
Although it claims that its planned share buyback programme will benefit investors by more than the equivalent of increasing its annual payout by 5%, personally, I’d rather have the cash in my hand.
However, dividends are never guaranteed.
And Legal & General’s particularly vulnerable to an economic slowdown. Higher interest rates have helped its annuity business but increased borrowing costs are generally bad for its other divisions.
Its earning suffered during the 2008-2009 financial crisis and it had to cut its payout as a result.
The group also operates in a highly competitive market where competition is fierce and earnings could suffer as a result. During the first six months of 2024, the group reported a net outflow of funds under management.
An encouraging outlook
But there are two aspects of its business that make me confident that it can grow its earnings over the medium term, which should help maintain the healthy dividend.
Firstly, its pension risk transfer arm has a huge pipeline of potential deals (£24bn). The company hopes to make money from these assets by generating more than the retirement benefits it has to pay.
Secondly, the potential earnings — known as the “store of future profits” — from its insurance business was £14.7bn, at 31 December 2023. This is the present value of the cash flows it expects to generate over the lifetime of its contracts. Although this calculation is sensitive to the assumptions made, I think it’s worth noting that it’s more than the group’s current market cap (£13.5bn).
Final thought
The headline to this article poses the question as to whether Legal & General is the ‘ultimate’ passive income stock.
This is a high bar to reach. And there are some stocks offering a better return and a few — not many — with a longer track record of growing their dividends.
For these reasons, I’m going to say that it’s one of the best dividend stocks around. And that’s why it’s on my watchlist for when I’m next in a position to invest.
