Image source: Getty Images
Anyone with a decent chunk of savings is always going to be on the lookout for the best way to invest that money for passive income. Whether it be through the stock market, real estate, or other places to park a bit of spare cash, savvy investors can hope to see wealth build slowly over time – ideally taking advantage of the amazing effects of compound interest.
Dividend yields are often a large part of this debate. That’s because the cash payouts rival some of the best returns that investors have seen throughout history. And with the forward yields of some of the FTSE 100’s most attractive dividend stocks pushing towards the 8% mark, that could mean a £20,000 stake turns into an income of £1,600 in the next year alone. Let’s take a closer look at one particular stock that could be perfect for this purpose at the moment.
Talked about
One of the most talked-about dividend stocks right now is FTSE 100 insurer Legal & General (LSE: LGEN). The stock is expected to pay 7.5%-8.5% over the next year – though projections vary. Those are big numbers, and you’d be hard-pressed to find many higher payouts the world over.
Is it a flash in the pan? After all, such high dividends are sometimes unsustainable. But that hasn’t been the case with this company in recent years. The stock has been in the high single digits for the best part of a decade, climbing above the 10% mark on occasion too.
There is dividend growth to throw into the mix as well. While a chunky dividend yield is what grabs the headlines, it’s the growth in dividends that makes these kinds of stocks so lucrative.
Legal & General has booked a 4.98% growth rate in the dividend over the last 10 years. This means investors haven’t just been enjoying some of the biggest dividends going; dividends have been rising as the years go on as well.
Competition
All gravy then? Let’s not get ahead of ourselves. It’s easy to be dazzled by a big number and the promise of huge financial returns. It’s not so easy to remember that there is more to an investment than a percentage yield. An investor is buying into a company, not merely a stock. That means underlying business performance is crucial to the quality of the investment over the long run.
In Legal & General’s case, its operations in insurance and wealth management exist in an extremely competitive market. The FTSE 100 alone contains several companies that are competing for the same business. This drives down profit margins and makes existing earnings risky too.
This is perhaps one reason why Legal & General shares have stuttered of late despite one of the best dividends going. Over the last five years, the share price has grown by only 14% and was actually down just a few months ago. In other words, during a booming time for many stocks, the share price in the Footsie insurer has not been keeping up with inflation.
On balance, this has to be looked at as one of the purer dividend stocks available at present. For those looking for good returns from dividends in the next year and beyond, I think it’s worth considering.
Should you invest £5,000 in Legal & General Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Legal & General Group Plc made the list?
John Fieldsend owns shares in Legal & General.
This story originally appeared on Motley Fool
