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The idea of a second income through investing is a dream shared by many. For some, it’s about supplementing a pension. For others, it’s a long-term path to early retirement.
One of the most popular ways to achieve this is through dividend stocks, where investors are rewarded with a portion of a company’s profits simply for owning shares.
These dividends can be incredibly useful. Reinvest them to grow your wealth, or withdraw them as cash for real-world income. A key figure to watch is the dividend yield – the annual payment expressed as a percentage of the share price.
But yield alone doesn’t tell the full story. High yields can be misleading. If a company’s share price drops due to weak financials, the yield may spike – even if the underlying business is deteriorating. And since dividends are never guaranteed, they can be cut at any time. That’s why it’s vital to assess not just the payout but the company’s ability to sustain it.
One company that supported my early steps towards a second income was Legal & General Group (LSE: LGEN).
A reliable dividend payer
Legal & General is a major UK insurer and asset manager. For years, it’s been a fixture among income portfolios – and for good reason. It’s regularly one of the top five yielders on the FTSE 100 and has a strong history of payments stretching back over two decades.
Lately, the yield’s climbed to a hefty 8.5%, up from around 5.8% in 2019. That looks extremely attractive compared to most UK blue-chips. But it hasn’t come without warning signs.
While the dividend’s grown, the share price has risen just 11% over the past five years. For those just looking at price, it would appear unappealing but the dividends have more than made up for the slow growth.
One concern is a sharp rise in the payout ratio, the proportion of profit used to fund dividends. If it rises too far, it can indicate that the dividend‘s no longer comfortably covered.
And there are other risks too. Exposure to volatile bond markets, regulatory pressures and rising costs all add some uncertainty to the company’s future. Yes, it’s a well-established and long-running business with an excellent dividend track record – but past performance is no indication of future results.
It always pays to be cautious and reduce risk by maintaining a well-diversified portfolio.
Strategic partnerships and long-term outlook
That said, there are positive signs for growth. The firm recently completed an £800m pension deal with Honda Group UK and has teamed up with Blackstone to expand into private credit, an increasingly lucrative market.
Strategic moves such as these are indicative of the company’s long-term outlook, aimed at diversifying income streams and strengthening long-term profits.
Legal & General was one of the cornerstones of my early passive income portfolio and remains a solid fixture in my holdings. Despite a few concerns today, I believe it’s still worth considering as part of a long-term income strategy.
For those looking to build a reliable second income, it’s hard to ignore a company with this level of history, yield and scale. Just don’t forget to balance out any stock with other holdings to spread the risk.
This story originally appeared on Motley Fool
