Image source: Getty Images
Legal & General (LSE: LGEN) shares now pay the largest dividend yield on the FTSE 100. It seems the strength of this dividend has got investors flooding in too – the share price is up 11% since November.
Is the wealth management and insurance firm the best bet for investors seeking big dividends from the UK’s best blue chips? And what might an example position of 10,000 shares produce in terms of lifelong passive income?
Biz model
Let’s start with the good. We’re discussing a stock that has proven to be one of the most resilient of the huge dividend payers. Many other stocks that have crept above the 6% mark only do so for brief periods. Legal & General have been at or above that percentage for most of the last 10 years.
The business model is well set up to keep the dividends rising for years too. While it’s hard to summarise the operations of a £15bn market cap enterprise, the firm collects fees on products like life insurance or investment products. The key point: these are reliable revenue streams. This is one reason that Legal & General boasts a 6% yearly average increase in the dividend over the last decade.
Reliable does not mean guaranteed, however. No dividends are ever guaranteed in fact. That’s simply the nature of this type of investing compared to something like savings accounts, such as a Cash ISA.
In Legal & General’s case, the last few years look like smooth sailing. But rewind to 2008 and the firm was caught up in the great recession. That crisis caused a huge drop in the firm’s dividend. And who’s to say? There could be a similar crisis just around the corner.
The income
What kind of passive income might we be looking at then? Let’s take an example position of 10,000 shares – equivalent to about £25,820 on the day that I write.
Going by the forecast dividend yield, an investor could receive £2,102 over the next 12 months. That’s the beginning of a nice little income stream, but it’s probably not life-changing for most.
The real beauty of investing though is in letting the earnings snowball over time. When it comes to dividend stocks, what we really want is to see the dividends increase over time. Extra points for reinvesting received dividends too! The effects of compound interest can be so strong that Albert Einstein is said to have referred to it as the “eighth wonder of the world”.
Let’s say an investor has 10 years before wanting to withdraw and the current 10-year dividend growth rate of Legal & General of 6% stays steady. By the withdrawal time, the investor will be taking in £8,637 a year for a 33% yield on the original stake. That sounds like cooking with gas!
This story originally appeared on Motley Fool
