I love this passive income stock but I know there are plenty of brilliant others available right now!
In my opinion, the ideal passive income stock should deliver steadily increasing above-average dividend payments. Fortunately, those looking to boost their earnings have a wide range of stocks to choose from.
My personal favourite is Legal & General (LSE:LGEN).
Why?
Its dividend was last cut during the 2009 global financial crisis, maintained during the pandemic, and is now expected to rise by 2% a year from 2025-2027. If the directors keep to their pledge it will be (in cash terms) nearly six times higher in 2027 than in 2009.
Based on amounts paid over the past year, the stockâs currently (28 November) yielding an impressive 8.7%. And although dividends canât be guaranteed, I think its current level of payout can be sustained for another few years, at least. That’s because the groupâs doing particularly well in the pension risk transfer (PRT) market.
Go back a few years and there were plenty of pension funds in deficit. But after a period of higher interest rates and additional employer contributions, many are now in surplus. Now’s a good time for trustees to offload these to third-party providers like Legal & General.
Indeed, over the past three months, the groupâs taken over the management of the BP and Ford (UK) schemes with a combined £6.2bn of assets. Over the next decade, the group reckons £1trn of funds will be secured by insurers in the UK, US and Canada alone.
Pros and cons
However, with such a large prize on offer, itâs no surprise the market can be competitive.
And I think itâs fair to say that the groupâs share price has been a bit of a disappointment in recent years. Since November 2020, itâs fallen by 4%. By contrast, the FTSE 100 index has increased 52% over the same period.
But the groupâs reputation is helping it win new business. In 2024, there were 299 PRT transactions. Included within this figure are 14 worth more than £1bn, with the group securing a third of these.
Other areas of the business â insurance and investment management — are also doing well but I think itâs the groupâs pensions arm thatâs likely to fuel its long-term growth and help maintain its dividend. On this basis, I think income investors could consider adding the stock to their portfolios.
Shopping around
But there are other opportunities available at the moment. On the FTSE 100, 10 stocks are presently offering a return in excess of 5.5%. This beats anything available from a high-interest savings account.
Looking at the FTSE 250, there are presently 13 stocks offering a higher yield than Legal & General. Many of these are investment trusts, including a number in the renewable energy sector. Higher interest rates have sent their share prices lower and their yields in the opposite direction.
The top 15 on the index includes three oil and gas companies. Lower energy prices have also dented their stock market valuations but strong cash flows have enabled them to maintain their dividends.
Legal & Generalâs the highest-yielding stock on the FTSE 100 at the moment. This is likely to bring it to the attention of income investors and is one of the reasons why itâs my favourite dividend share. However, as we’ve seen, there are lots of others to choose from.
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More reading
- Meet the dividend stocks tipped to outshine Lloyds shares for passive income!
- Here’s why Stocks and Shares ISA investors shouldn’t ignore the Autumn Budget
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- SIPP growth made simple: build for retirement with FTSE 100 dividend shares
- Legal & General shares offer one thing no other FTSE 100 stock does â can it last?
James Beard has positions in Bp P.l.c. and 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.
