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It’s hard to define the most popular dividend stock in the UK. But if we search for the most-bought ones on investment platforms, it looks like Legal & General (LSE: LGEN) leads the way.
With its 8% forecast dividend yield — the biggest on the FTSE 100 right now — it’s easy to see why. But there needs to be more to it than just that.
Yield isn’t everything
For investors looking for passive income from dividend shares, just chasing the highest yield and ignoring everything else can be a mistake. So, does Legal & General have enough behind it to support that dividend? Here’s what it offers…
- A forecast dividend yield of 8%
- Strong balance sheet and Solvency II coverage ratio of 210%
- £1.2bn share buyback announced in March
At full-year results time on 11 March, CEO António Simões said:
This week we will begin a £1.2bn share buyback – the largest in our history – which, together with guided dividend per share growth of 2% this year, will bring planned returns to shareholders to £2.4bn over the next year.
And at 31 December 2025, the company had £17bn in cash and equivalents on the books. Does this sound like a cash cow that’s generating plenty of profit and is focused on paying it out to shareholders? It does to me.
Not all roses
I do, however, see some potential downsides that investors need to be aware of…
- Disappointing small 2% dividend rise for 2025
- Stock valuation looking perhaps a bit high
- Stubborn inflation potentially hurting the business
Forecasters predict a strong year for earnings this year. But they then see earnings dropping in 2027. If they’re right, it could lift the Legal & General price-to-earnings (P/E) ratio to 11.5 by then — assuming no share price change.
The insurance sector has a cyclical history. And analysts could easily see that valuation as firmly on the high side. At the very least, it makes me suspect we’re not likely to see much share price gain. I included the iShares Core FTSE 100 ETF in the chart above, to show how Legal & General shares have lagged the FTSE 100 by quite some margin in the past five years.
So should we buy?
High inflation can help keep bond prices up. And that can offer income investors a low-risk alternative to dividend shares.
But, even with these factors in mind, I do see how the plus points keep the stock at the top of the UK’s dividend buy lists. So will I buy Legal & General shares? No, but that’s really only because I hold Aviva — and diversification is always very important. Aviva has a more modest 6.4% yield forecast, but also a P/E that is expected to fall rather than rise.
But I reckon investors seeking a long-term dividend stock to add to an ISA should definitely consider Legal & General — as part of a diverse portfolio covering a range of sectors.
Should you invest £5,000 in Legal & General Group Plc right now?
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Alan Oscroft owns shares in Aviva.
This story originally appeared on Motley Fool
