I’d buy 5,505 shares of Legal & General for £1,200 a year in passive income

This writer looks at how much he’d need to invest in Legal & General shares to target the equivalent of £100 a month in passive income.

| 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.

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.

Legal & General Group (LSE: LGEN) regularly appears on the list of the most bought shares at the big investment platforms. Not that this ever seems to move the share price, mind. It’s down 10.8% in 2024 and 17% in five years!

So what do these investors (myself included) see in the FTSE 100 stalwart?

Created with Highcharts 11.4.3Legal & General Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL25 Oct 201925 Oct 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

Huge passive income potential

The most obvious draw here is the large dividend on offer. Last year, the financial services giant upped its annual payout by 5% to 20.3p per share. The payout for this financial year is expected to total 21.3p.

Should you invest £1,000 in Legal & General right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Legal & General made the list?

See the 6 stocks

With the current share price of 224p, this translates into an astonishing 9.5% dividend yield. This means investors scooping up some shares are targeting inflation-busting income.

However, it’s worth keeping an eye on the misfiring share price. If it were to decline 9.5% this year, then that would effectively cancel out the dividend, at least on a total return basis. In other words, the capital loss from the price drop would offset the dividend income.

A fantastic record

Another likely reason that investors feel confident in the firm is its tremendous track record of dividend growth. Indeed, the payouts have risen like clockwork over many years.

Source: TradingView

As we can see above, the only blip was during the 2008/09 financial crisis, which is understandable given that the financial services industry was at the epicentre of the chaos. Many firms faced bankruptcy and were bailed out by the government.

This does highlight how dividends aren’t ever guaranteed though, especially when a crisis triggers panic throughout the financial system. These can hit Legal & General’s profits and even lead to a loss.

Financial strength

One outcome of the financial crisis was that it led to stricter regulations and stronger balance sheets across the industry.

Legal & General has consistently maintained a solvency coverage ratio comfortably above regulatory requirements. In the first half of 2024, it was 223%. That’s more than twice the required capital to cover its liabilities, providing a strong buffer and solid base.

Of course, there’s an opportunity cost associated with holding that much capital. Growth hasn’t exactly been exciting at the firm in recent years, and I’d guess that probably explains the disappointing share price performance.

A £100-a-month second income

Looking ahead, both Legal & General and City analysts see the payout increasing by around 2% in 2025 and 2026.

YearDividend per shareDividend yield
202421.3p9.5%
202521.8p9.7%
202622.3p9.9%

Were next year’s dividend of 21.8p to be met, we’d be looking at a jumbo 9.7% yield. In practice, this means I’d need 5,505 shares to target £1,200 a year in passive income — the equivalent of £100 a month.

Those shares would cost around £12,337. If I couldn’t afford that sum upfront, I could invest £343 a month to build up that position over three years.

Of course, this is just an illustration. In reality, the share price will move up and down. When it falls, I’d get more shares and a higher yield, and vice versa. I also wouldn’t ever rely on a single stock for dividends.

Legal & General remains a stalwart in my own passive income portfolio. I plan to buy more shares before Christmas to lock in that 9%+ dividend yield.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI 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.

Ben McPoland has positions in Legal & General Group Plc. 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

Businesswoman calculating finances in an office
Investing Articles

Down 23% with a 6.5% yield, this FTSE 250 dividend gem looks undervalued to me!

Not many stocks on the FTSE 250 have a low valuation, high dividend yield, and solid growth potential. Our writer…

Read more »

Investing Articles

Is Tesla stock running out of road?

Tesla stock’s been tumbling over the past couple of months. This writer would like to own some -- but has…

Read more »

Investing Articles

£20,000 in savings? Here’s how it could be used to target a £278 monthly second income

Our writer illustrates how £20k could lay the foundations for a second income of several hundred pounds a month over…

Read more »

Photo of a man going through financial problems
Investing Articles

I asked ChatGPT to name the FTSE 250 share it would buy in a heartbeat – and it went mad!

Harvey Jones wondered whether artificial intelligence was up to the job of finding him a brilliant FTSE 250 share to…

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Is the BP share price primed for lift off?

As an activist investor takes a substantial holding in BP, Andrew Mackie assesses what it will take to energise the…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

No savings? I’m using the 5-step Warren Buffett method as I aim to get rich

Christopher Ruane outlines a handful of investment techniques he uses, inspired by the incredible stock market record of Warren Buffett.

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

With a spare £3,000, here’s how a new investor could start buying shares

Our writer explains how someone with a few thousand pounds and no prior stock market experience could start buying shares…

Read more »

UK money in a Jar on a background
Investing Articles

£10,000 invested in Greggs shares in 2020 has made this much passive income…

Greggs shares have struggled lately due to economic weakness and rising costs. Are they still worth considering for an ISA…

Read more »