Legal & General (LSE: LGEN) shares paid a 2024 dividend of 21.36p, giving a current yield of 9.8%.
Yields vary as a stock’s price moves and annual dividends change. In the case of this FTSE 100 financial services and asset management firm, analysts project they will rise over the next three years at least.
Specifically, projections are for the annual payout to increase to 21.9p in 2025, 22.3p in 2026, and 22.6p in 2027.
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This would give respective yearly yields based on the current £2.23 share price of 10%, 10.3%, and 10.4%.
By comparison, the average yield of the FTSE 100 is 3.6% and of the FTSE 250 3.4%.
Dividend income generation
£11,000 is the average savings amount in the UK. Investors considering using just half of this in Legal & General would make £539 in dividends in the first year.
On the same yield over 10 years this would rise to £5,390 and over 30 years to £16,170.
This is a lot more than could be made in a standard UK bank savings account. It also easily outstrips the current 4.8% available from the ‘risk-free rate’ (the 10-year UK government bond yield).
Turbocharging the payouts
These annual dividend payouts can be supercharged by using a standard investment practice known as ‘dividend compounding’. This simply involves reinvesting the dividends paid by a stock back into it.
It is like leaving interest to keep accruing in a saving account, and the effects on the payouts are astonishing.
In Legal & General’s case the same £5,500 invested at the same average 9.8% yield would make £9,096 in dividends after 10 years not £5,390. And after 30 years on the same basis, this would rise to £97,302 rather than£16,170!
Adding in the initial £5,500 stake and the holding would be worth £102,802. This would generate £10,075 a year in passive dividend income! This is money made with minimal effort.
Potential share price bonus
I think Legal & General shares are also extremely undervalued at their current price.
This conclusion reflects a discounted cash flow valuation using other analysts’ figures and my own. The model pinpoints the price at which any stock should be trading, based on a firm’s future cash flows.
What it shows here is that Legal & General shares are 61% undervalued right now.
Therefore, the fair value for them is £5.56, although the markets are unpredictable.
A risk to this for the firm is the cut-throat competition in its sector which may squeeze its earnings. Another is ongoing financial market volatility resulting from the US’s recently announced trade tariffs.
As it stands though, consensus analysts’ expectations are that Legal & General’s earnings will rise 29% every year to end-2027.
Will I buy more of the stock?
I believe such earnings growth would push the firm’s share price – and dividend – much higher over time.
Given this, I have no hesitation in adding to my Legal & General holding at the earliest opportunity.
