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Legal & General (LSE: LGEN) shares may not have grabbed the headlines like Aviva, but 2025 has made for a solid year. The share price is up 10.6%, and the dividend yield remains a hefty 8.4% – exactly why income-focused investors pay attention.
A £10,000 investment in January would now be worth £11,995 — a 20% return when share price growth and dividends are combined.
However, with the share price stagnating over the past five years, dividends remain the main attraction. The big question for 2026: can the stock keep delivering such strong payouts despite ongoing concerns over dividend sustainability?
Shaky dividend?
When assessing dividend cover, I run a few quick checks. First up: earnings cover – simply earnings per share divided by dividends per share. For Legal & General, it’s just 0.14, far below the 1 needed for comfort.
Next, I check operating cash flow. Over the last two years, the company has generated negative cash flow, meaning the dividend hasn’t been paid from ongoing operations.
So, if it’s not coming from earnings or cash flow, where is the dividend being funded from?
Alternative measure
Traditional accounting numbers don’t really work for insurance companies. That’s because most of their assets are long-term, and the cash doesn’t come back quickly.
Instead, I focus on operating surplus generation (OSG). Think of it as the money the existing business is expected to generate over the next year, based on realistic investment returns, expected claims and expenses, and known management plans.
Importantly, it ignores surprises like market swings or new business. It gives a much clearer picture of how much capital the business can realistically use to pay dividends or reinvest.
Based on the 2024 numbers, this measure shows the dividend was covered about 1.42 times. That’s below my ideal comfort level of two times, but it does a much better job of showing where shareholder payouts are really coming from.
Dividend growth
While recent dividend cover has been modest, the key question is how it evolves from here. On that front, the outlook looks more reassuring.
Out to 2027, dividends per share are expected to grow at around 2%, with share buybacks providing an additional lift.
In its H1 results, the company said that OSG is expected to grow by roughly 5% in 2025, comfortably outpacing dividend growth.
That widening gap should gradually improve dividend cover. It will be further reinforced once the planned £1bn share buyback programme – funded by the sale of the US protection business – is completed. A lower share count is expected to reduce the cash cost of the dividend by around £100m.
A risk to watch
As OSG is a forward-looking measure, one risk I’m monitoring closely is the annuities book. A sharp rise in bond yields could reduce the market value of existing fixed rate assets, increasing balance-sheet volatility in the short term. While higher yields can improve long-term annuity margins, sudden moves may temporarily disrupt capital generation and delay dividend cover improvement.
Bottom line
Legal & General has been a core part of my ISA for years. Riskier than some FTSE 100 peers, but the high yield and growing capital generation make me comfortable holding it for steady long-term income. And it’s far from the only stock I own for passive income.
