A massive 9.1% yield at a 36.3% discount!? Should investors consider buying this passive income gem?
Making a passive income with FTSE 100 shares is one of the easiest ways to build wealth while sleeping. These established and mature enterprises have historically proven to be quite stable. And with revenues being generated largely from international markets, most aren’t bogged down by the weak economic growth in Britain like many other UK shares.
The index currently offers a historically modest payout of 3.3%. But some of its constituents are being far more generous. For example, Legal & General (LSE:LGEN) shares pay almost three times as much with a dividend yield of 9.1%. And according to an analyst at Barclays, the shares are close to 40% undervalued as well!
A bullish income opportunity
As per the latest share price forecasts, the analysts at Barclays believe that Legal & General shares should be worth closer to 320p. That’s about 36% higher than where the stock is currently trading. And digging deeper, this optimistic outlook isn’t entirely far-fetched.
The company has a leading position within the UK pensions and bulk annuities market. That’s a key advantage over its peers when capitalising on the ageing population of Britain and rising demand for retirement solutions.
What’s more, its annuity portfolios generate predictable and stable long-term cash flows. That’s terrific news for dividend investors seeking a sustainable passive income. And it explains how the financial institution has been able to maintain shareholder payouts for over 25 years, without making a single cut since 2009.
Combining this with growth opportunities in the group’s investment management division, Barclays believes the markets are significantly undervaluing this business. So, does that make it a no-brainer buy?
What do the sceptics say?
Barclays isn’t the only bull backing Legal & General. However, overall, opinions seem to be mixed, with the average consensus forecast suggesting that the stock is already fairly valued. That’s because there’s a big question mark over the group’s exposure to UK gilts.
Legal & General uses these government bonds to generate a predictable income stream at low risk. However, with rising UK government debt levels and fiscal pressure on the national budget, there’s growing concern among investors about whether the British government can keep up in the long run.
The result? Increasing volatility in gilt yields. And for Legal & General use of leveraged funds and liability-driven investing strategies to hedge risk could backfire, resulting in substantial losses that could have a severe impact on its balance sheet, as well as introducing liquidity risk.
Time to buy?
Barclays did highlight the UK gilt exposure in its bullish forecast. But it seems to be confident that Legal & General’s long track record of navigating through market volatility makes it more resilient than most other investors believe.
There’s certainly an exciting income opportunity here if Barclays is right. And given the high yield, it’s definitely a stock worth investigating further. However, there’s also no denying that lower-risk passive income opportunities exist within the FTSE 100 today. And personally, those look more tempting for my portfolio.
The post A massive 9.1% yield at a 36.3% discount!? Should investors consider buying this passive income gem? appeared first on The Motley Fool UK.
Should you invest £1,000 in Legal & General Group Plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool 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?
More reading
- With 10,000 Legal & General shares, this is how much second income an investor could earn
- £20k in savings? Hereâs how you could try to turn that into a £13,582 annual passive income
- How much do you need in a SIPP to aim for a £30,000 annual passive income at retirement?
- See how much income 1,696 Legal & General shares pay when the dividend lands on 26 September
- 3 reasons income stocks trump growth stocks
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
