Legal & General (LSE:LGEN) shares went ex-dividend last week. So investors like myself have another tasty bit of income to look forward to next month, namely the interim dividend.
And with Legal & General still sporting the highest dividend yield in the FTSE 100 (7.7%), there will be a chance for me to reinvest the dividend payment back into this ultra-high-yield stock. It’s a tempting prospect, I admit.
However, September may well be the last dividend I receive because I’m considering selling the stock soon. Here’s why…
A brief rally
Recently, the share price jumped above 300p for the first time in nearly five years. Indeed, it hit 318p a couple of weeks ago.
Suddenly shareholders were getting gains alongside high-yield dividends — an income investor’s dream!
Unfortunately, the rally didn’t last. Since then, the stock has dipped almost 10%, back where it was in mid-June.
Now, some of this is due to the insurer going ex-dividend, as mentioned. But not all of it. Instead, multiple brokers emerged to pour cold water on the rally, arguing that the stock didn’t look attractive at the higher level.
That’s disappointing. After all, the stock has underperformed the FTSE 100 over the past five years, even when dividends are included. According to AJ Bell, Legal & General has delivered an annualised total return of 7.8% versus 12.8% for the Footsie.
The issue most of these cautious City brokers have relates to growing competition in the pension risk transfer (PRT) market. Last week, Standard Life expanded its PRT business through a partnership with CVC, Prudential Financial, and Goldman Sachs. This will enable it to participate in larger transactions.
There’s also ongoing pressure on asset management fees for passive tracking products. As such, some brokers are questioning the sustainability of the dividend over the medium term.
For example, Jefferies has a 191p target on the stock, which is 32% lower than the current share price. It questions whether operational surplus capital will adequately cover shareholder returns while also supporting capital-hungry PRT deals.
Better alternatives elsewhere?
Admittedly, Jefferies is the most bearish of City analysts, and one has a significantly higher target of 385p. So it’s not all doom and gloom.
Meanwhile, there are over £1.2trn of defined-benefit pension liabilities in the UK yet to be transferred to insurers, according to CVC. So this massive market is bound to attract rivals.
But with PRT competition growing, potentially leading to lower margins, and the share price’s inability to ever really kick on, I wonder whether there are better opportunities elsewhere.
I already hold other UK dividend stocks, including Aviva, HSBC, and LondonMetric Property. All have lower starting yields, but they do appear to have safer dividend sustainability profiles over the medium term (nothing guranteed, of course).
Then again, the Legal & General dividend does seem secure for the time being. And with the payout expected to edge up 2% next year, the stock’s offering a forward-looking yield of nearly 8%.
So what am I going to do? I will sell half my holding in the coming days then wait for the company’s Q3 update, which is due in November. If that’s mixed, I might offload entirely.
In the meantime, I’m going to scour the FTSE 350 for new high-yield income ideas. Thankfully, there are plenty about right now.
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Ben McPoland owns shares in Aviva, HSBC, Legal & General, and LondonMetric Property.
This story originally appeared on Motley Fool
