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Investors seeking passive income are always likely to be drawn to Legal & General (LSE: LGEN) shares. The FTSE 100 asset manager and insurer offers one of the most eye-catching dividend yields on the blue-chip index.
Today, the trailing yield stands at 8.7%. That’s forecast to edge up to 8.9% in the year ahead. That’s a brilliant level of income at any time, but it could make this an especially attractive moment for investors to get involved.
Top FTSE 100 income play
Dividend stocks have to compete with cash and bonds. Inflation and interest rate hikes have boosted cash and bond yields, and investors can earn without the potential volatility of shares. Personally though, I favour income stocks because they offer both high yields and the potential for capital growth.
I get around the market’s volatility by holding a spread of different shares for the long term. My Self-Invested Personal Pension, or SIPP, includes Legal & General, which I bought a couple of years ago. I thought inflation and interest rates would fall faster than they have, slashing yields on cash and bonds. That’s held back Legal & General’s share price, in my view.
A brilliant dividend
It’s risen just 12% over the last year, and roughly the same over two. That’s disappointing, but when I add dividends, my total two-year return is a more cheery 30%. I wouldn’t have got that from cash or bonds.
Lately, the shares have started to move again, up 4.5% in the last month after a strong trading update on 23 October. Are they ready for lift-off?
Management expects to deliver full-year 2025 core operating earnings per share growth at the upper end of its 6%-9% target range, alongside operational surplus growth above 3%. The group’s wide range of business lines, from workplace pensions and annuities to lifetime mortgages and protection, all made progress.
The board also sees a major opportunity in pension risk transfers, where firms hand their pension schemes to specialists like Legal & General. The company expects the UK market to double to £1.5trn by 2034. That’s a huge opportunity, and while a decade sounds far off, investing is all about patience.
Modest growth forecasts
In the shorter term, there’s reason for optimism too. The Bank of England is tipped to start cutting interest rates in December, with further reductions next year. That would reduce the appeal of cash and bonds and make today’s yield look even more attractive.
There are still risks. Rate cuts aren’t guaranteed and Legal & General’s £1.1trn in assets means it’s exposed if markets crash or correct, as some warn. Competition in pension risk transfers is also heating up, so it won’t have the field to itself.
Even so, the outlook has brightened. Analysts’ consensus one-year target price is 263.8p, implying growth of about 7.8% from today’s 245p. Combined with that forecast 8.9% yield, total returns could hit roughly 16.7%. That would turn a £10,000 investment into £11,660. Not stellar, but it would push my three-year total return past 45%.
Analysts aren’t wildly bullish, with only a handful rating it a Strong Buy, but I think investors might consider buying at this level. At some point, the Legal & General share price could fly, and I’ll keep reinvesting every dividend until that happy day arrives.
