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In my opinion, the ideal passive income stock should deliver steadily increasing above-average dividend payments. Fortunately, those looking to boost their earnings have a wide range of stocks to choose from.
My personal favourite is Legal & General (LSE:LGEN).
Why?
Its dividend was last cut during the 2009 global financial crisis, maintained during the pandemic, and is now expected to rise by 2% a year from 2025-2027. If the directors keep to their pledge it will be (in cash terms) nearly six times higher in 2027 than in 2009.
Based on amounts paid over the past year, the stock’s currently (28 November) yielding an impressive 8.7%. And although dividends can’t be guaranteed, I think its current level of payout can be sustained for another few years, at least. That’s because the group’s doing particularly well in the pension risk transfer (PRT) market.
Go back a few years and there were plenty of pension funds in deficit. But after a period of higher interest rates and additional employer contributions, many are now in surplus. Now’s a good time for trustees to offload these to third-party providers like Legal & General.
Indeed, over the past three months, the group’s taken over the management of the BP and Ford (UK) schemes with a combined £6.2bn of assets. Over the next decade, the group reckons £1trn of funds will be secured by insurers in the UK, US and Canada alone.
Pros and cons
However, with such a large prize on offer, it’s no surprise the market can be competitive.
And I think it’s fair to say that the group’s share price has been a bit of a disappointment in recent years. Since November 2020, it’s fallen by 4%. By contrast, the FTSE 100 index has increased 52% over the same period.
But the group’s reputation is helping it win new business. In 2024, there were 299 PRT transactions. Included within this figure are 14 worth more than £1bn, with the group securing a third of these.
Other areas of the business – insurance and investment management — are also doing well but I think it’s the group’s pensions arm that’s likely to fuel its long-term growth and help maintain its dividend. On this basis, I think income investors could consider adding the stock to their portfolios.
But there are other opportunities available at the moment. On the FTSE 100, 10 stocks are presently offering a return in excess of 5.5%. This beats anything available from a high-interest savings account.
Looking at the FTSE 250, there are presently 13 stocks offering a higher yield than Legal & General. Many of these are investment trusts, including a number in the renewable energy sector. Higher interest rates have sent their share prices lower and their yields in the opposite direction.
The top 15 on the index includes three oil and gas companies. Lower energy prices have also dented their stock market valuations but strong cash flows have enabled them to maintain their dividends.
Legal & General’s the highest-yielding stock on the FTSE 100 at the moment. This is likely to bring it to the attention of income investors and is one of the reasons why it’s my favourite dividend share. However, as we’ve seen, there are lots of others to choose from.
