Image source: Getty Images
I’m constantly looking for top-notch stocks to add to my passive income portfolio. And looking out across the entire FTSE 100, Legal & General Group (LSE:LGEN) currently stands out among the crowd. Why? Because it currently has the highest yield in the index at 8.9%!
Other income investors have also seemingly taken notice, with Legal & General shares being among the top 10 buys in the last month, according to AJ Bell. And it’s not difficult to see why.
With just 4,655 shares, investors can earn £1,000 each year in dividends at the current level of payout. Looking at the share price today, such an investment would cost around £11,350. By comparison, passive index investors would need to spend closer to £32,260 to generate the same income stream.
So should I be rushing to buy this high-yield FTSE stock? Or is this an investment trap?
More dividends on the horizon
At first glance, there’s a lot to like about Legal & General’s dividend. Apart from the high yield, the insurance giant has successfully raised shareholder payouts 14 out of the last 15 years by an average of 11.8% annually. And that trend has seemingly continued in 2025 with the interim dividend receiving yet another boost.
Looking ahead, more dividend growth could be on the horizon. Management outlined its ambitions earlier this year to return £5bn back to shareholders through dividends and share repurchases.
Needless to say, that sounds like a no-brainer. So why aren’t more investors capitalising on the high yield?
Nothing’s guaranteed
As of the firm’s latest results, Legal & General’s generating enough cash flow to cover its dividend obligations. However, this payout coverage is getting pretty tight. Across the first six months of 2025, operating profits landed at £905m. But dividends paid during the period reached £898m.
In other words, Legal & General’s generating enough cash flow to afford its yield. But there’s virtually no margin of error. And right now, having some wiggle room could be essential.
As an asset manager and insurance business, Legal & General’s highly sensitive to volatility within the stock and bond markets. Both are currently facing macroeconomic challenges and uncertainty that could adversely impact the group’s investment performance as well as reduce new business volumes.
This is particularly prevalent in the pension risk transfer market today. Interest rate cuts are steadily reducing the opportunities and demand for annuities, which have been a terrific source of profits in recent years.
But if these diminishing cash flows can’t be offset with other financial products, Legal & General’s earnings may struggle to keep up with its expanding dividend burden. And in this scenario, a payout cut would likely be inevitable.
The bottom line
Legal & General’s high yield is undoubtedly attractive. But it’s also a reflection of the risk associated with this business, as is the group’s relatively flat share price performance over the last five years.
Personally, the risk’s too high for my portfolio. Even more so, considering there are far more exciting and sustainable dividend opportunities available to explore right now.
