Discover the Secret to Earning Passive Income with Legal & General: 9.3% Yield and Growing Dividends Await!

With Legal & General (LSE:LGEN) shares currently offering a tempting dividend yield of 9.3%, it may seem like the perfect choice for investors seeking passive income. However, the reality is more complex than it appears. Let’s delve into the intricacies of Legal & General’s performance and prospects.

Five-year returns

Five years ago, Legal & General boasted a 6.6% dividend yield, which was quite attractive at that time. Since then, the company has consistently increased its shareholder distributions by around 3% annually. However, despite the steady growth in dividends, the stock price has declined, resulting in minimal total returns for investors. Those who bought the stock in December 2020 have seen only a 3.9% return, falling behind the FTSE 100 and inflation rates.

Is the dividend safe?

While a dividend yield of 9.3% provides a cushion against share price fluctuations compared to a 6.6% yield, investors may question the sustainability of this high dividend. Legal & General forecasts a 2% annual increase in dividends, complemented by share buybacks. Although the firm pays out more to shareholders than its net income, its excess capital of over £9bn as of the end of 2023 should ensure that it meets its dividend commitments.

Outlook

Legal & General’s Pensions Risk Transfer business is a key growth driver, involving taking on pension obligations from other companies in exchange for a fee. Management is optimistic about securing new deals in the future, but investors must assess the quality, not just quantity, of these agreements. Despite the upfront cash benefits, the potential risks associated with these contracts are asymmetric, impacting the firm’s profitability in the long run.

A no-brainer?

For investors, Legal & General shares are far from a straightforward choice. The uncertainty surrounding the company’s future liabilities underscores the need for a high dividend yield to offset risks. While a 9.3% yield may appeal to some, others may seek alternative investment opportunities.

In conclusion, while Legal & General’s dividend yield may appear enticing, investors must carefully weigh the risks and uncertainties associated with the stock. Vigilance and thorough evaluation are key to navigating the complexities of investing in Legal & General shares.