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Legal & General (LSE: LGEN) shares now give investors the second biggest dividend yield on the entire FTSE 100, at just over 9% on a trailing basis.
That’s an absolutely stellar rate of income, roughly double what’s on offer from a best buy instant access account. Only housebuilder Taylor Wimpey pays more.
There’s also the prospect of capital growth on top if the Legal & General share price rises. It’s a brilliant combination, and I personally hold the insurer in my own Self-Invested Personal Pension (SIPP).
So why isn’t every saver piling into the stock and filling their boots?
High yield, high risk
Legal & General’s certainly popular, often featuring in the list of top 10 retail buys, but investing is riskier than saving. For a start, capital is at risk. A high dividend doesn’t look so clever if the share price falls, which will erode the money investors originally put in.
The Legal & General share price is up 5% in the last year and 20% over five years, with dividends on top. The total return’s respectable, although not exactly mind-blowing.
It’s had a bumpy month, falling 9% after JP Morgan Cazenove trimmed its target price to 275p from 290p, citing pressure on earnings and rising competition in the pension risk transfer market.
There’s another worry. Investors usually like to see a dividend per share covered at least twice by earnings, but here they’re forecast to be covered just once.
Dividend strength and weakness
Group profits have been uneven, while earnings per share growth has been negative for three years in a row, as my table shows.
| 2020 | 2021 | 2022 | 2023 | 2024 | |
| Pre-tax profits | £1.499bn | £2.632bn | £939m | £195m | £542m |
| EPS growth | -28 % | 55 % | -62 % | -43 % | -61 % |
Yet the dividend per share has continued rising, with a 5% increase to 21.36p in 2024. Dividend growth’s expected to slow to 2% now, below the current inflation rate of 3.8%. I still think the payout looks reasonably safe, but we never know.
In 2025, the board’s forecast to pay a dividend of 21.81p. So if an investor wanted to generate income of £100 a month, or £1,200 a year, they’d need 5,502 shares. At today’s price of 238.30p, they’d have to invest £13,111.
That’s a sizeable outlay for one stock, and I’d prefer to spread it around to reduce risk. FTSE 100 rivals M&G and Phoenix Group Holdings also yield above 8%, so there are alternatives in the same sector.
Even so, Legal & General remains tempting. If interest rates start falling, its high yield should look even more appealing as cash and bond returns decline. That could attract more buyers and boost the stock too.
Long-term rewards
There are no guarantees. Unless earnings start to grow, the dividend could be in trouble. Yet I’m holding my shares and considering buying more on recent weakness. Investors might consider doing the same, but come to their own decision on whether the dividend is sustainable.
As ever, they should buy with a long-term view. That gives the dividends and share price plenty of time to compound and grow. I’m not expecting fireworks here, but with a yield of almost 9%, Legal & General may tempt income seekers who understand there are risks here too.
