This FTSE 100 stock’s offering passive income of 9%. But is this yield too good to be true?
Passive income shares are usually defined as stocks that provide a regular income through dividends. But I think this can be misleading. After all, only 38 of the UKâs 350 largest listed companies donât pay a dividend. Overall, the FTSE 350âs presently (17 October) yielding 3.29%. However, by doing a bit of research, I think itâs possible to do a lot better than this.
For example, the highest-yielding share in my Stocks and Shares ISA is Legal & General (LSE:LGEN). With a return of 9%, it also happens to be the most generous on the FTSE 100. This is based on amounts paid over the past 12 months.
It used to be said a stock thatâs yielding close to twice the return of that offered by 10-year government bond — used as a proxy for a ârisk freeâ rate of return — needs to be treated with caution. Although this is only a rule of thumb, itâs a useful guide when looking at passive income opportunities.
The current gilt rate’s 4.48%. Legal & Generalâs yield puts it just above twice this level.
Buyer beware
Sometimes, a generous yield is caused by a combination of a steady dividend and falling share price. That’s why high yields should be viewed with caution. And a look back over the previous five years, shows this is true (in part) with the FTSE 100 wealth provider.
Throughout the 2020s, Legal & General’s been yielding comfortably above the index average. But itâs started to move higher over the past three years or so, mainly due to a sluggish share price.
| Financial year | Dividend (pence) | Share price (pence) | Yield (%) |
|---|---|---|---|
| 2020 | 17.57 | 266 | 6.6 |
| 2021 | 18.45 | 298 | 6.2 |
| 2022 | 19.37 | 250 | 7.8 |
| 2023 | 20.34 | 251 | 8.1 |
| 2024 | 21.36 | 230 | 9.3 |
However, the stock has an impressive track record of increasing its payout. It was last cut during the 2008-2009 financial crisis. And was kept unchanged for one year during the pandemic. Itâs pledged to increase it by 2% a year from 2025-2027. As is the fashion these days, itâs also recently completed a £500m share buyback programme.
Of course, there can never be any guarantees that its payout will be maintained indefinitely. The group faces increased competition in a sector thatâs starting to attract some low-cost rivals. And it maintains a large investment portfolio to help meet its obligations to its insurance and pension clients. This means it faces the same risks and challenges as anyone else who invests in the stock market.
My view
But I think there are plenty of reasons why the groupâs earnings will continue to grow, which increases the chances that its generous dividend can be sustained.
The group recently passed £200bn of assets under management (AUM) in its defined contribution pensions business. It has set itself a target of achieving inflows of £40bn-£50bn by 2028. Across all its divisions, it has £1trn of AUM. With 42% of these overseas, itâs not entirely dependent upon a UK economy that appears fragile.
Itâs also winning from higher interest rates, which help push up annuity rates making them more attractive to pensioners. In addition, the group retains a strong balance sheet. It holds over twice the level of reserves that regulators require it to.
Principally due to the generous level of passive income on offer, I think Legal & General’s a stock well worth considering. However, recent history suggests its share price is unlikely to take off any time soon. Â
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- Legal & General shares yield a bumper 9.1% – but is its dividend safe?
James Beard has positions in Legal & General Group Plc. 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.
