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Legal & General (LSE: LGEN) shares have been pretty underwhelming. They’re up around 23% over the last year, but over five years they’ve gained just 2.5%. That’s thin compared with FTSE 100 rival Aviva, which is up 85% over five years.
Legal & General’s dividend has been much more eye-catching, with a trailing yield of 7.3%. At times, it’s hit double digits. When yields get this high, investors worry. Is it sustainable?
The board has increased the dividend every year since the pandemic at an average rate of 4.22% a year. However, growth slowed to just 2% in 2025, and the board has indicated that it will continue to rise at that pace.
While that offers investors useful visibility, it’s actually below inflation, which hit 3.1% in August. So it’s losing purchasing power. In its defence, when the board announced that 2% policy, we were all expecting inflation to fall.
FTSE 100 income star
The forecast yield is now 7.54% for 2026, rising to 7.65% in 2027. Still a terrific income stream, if it comes through. Dividend cover looks alarmingly thin. Based on 2025 core operating earnings of 20.93p per share, the 21.79p dividend was covered less than one times earnings.
However, that isn’t how Legal & General wants investors to assess the payout. Its Solvency II operating surplus generation was £1.5bn in 2025, up 5%. The dividend cost roughly £1.2bn, giving it a nice margin. Management expects capital generation to grow faster than the dividend. With luck, that should create more headroom.
Strong balance sheet
Legal & General ended 2025 with a Solvency II coverage ratio of 210%, comfortably above its medium-term operating range of 160% to 190%.
2026 results so far are encouraging. First-half core operating profit rose 7% to £918m while earnings per share jumped 11%. Solvency II capital generation increased 3% to £790m. The coverage ratio dipped slightly to 201%, but the board said it had improved dividend cover through both earnings and capital generation.
There are risks. Legal & General’s exposed to financial markets, interest rates, property and credit conditions. Like most financial stocks, it could suffer in a stock market crash. Its asset management arm also needs to raise its game after a difficult period.
Price-to-earnings ratio
Are the shares good value? Weirdly, some platforms show a very low price-to-earnings ratio of 0.35. That’s distorted by the accounting treatment of this complicated financial business. The low forward P/E around 7.7 looks tempting, although different data providers produce different figures.
Overall, I think the dividend looks fairly solid. The board clearly understands how important income is to shareholders and is committing to continued growth, albeit at a slow pace.
I think Legal & General’s worth considering. After years of lagging rivals, the shares might finally deliver some growth, but I’ve been saying that for a long time. I can see other tempting dividend stocks out there, possibly with better growth prospects.
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Harvey Jones owns shares in Legal & General.
This story originally appeared on Motley Fool
