£5,000 buys 1,938 shares in this 8.4%-yielding passive income stock!

The UK’s home to some incredible passive income stocks. One of the most impressive is Legal & General (LSE:LGEN), the FTSE 100 financial services group. It’s currently (6 March) offering a yield of 8.4%, the highest on the index.

This level of return is 2.5 times that of the Footsie as a whole. But a high yield can be a warning sign that investors are expecting a cut in a stock’s payout. Let’s take a closer look.

Why so high?

Given that the yield is calculated using two numbers – a company’s share price and its dividend – it’s relatively easy to see what’s going on. If both these factors increase (or decrease) by the same percentage, the yield will be unchanged. However, any divergence and things will be very different.

Ten years ago, in March 2016, Legal & General’s share price was hovering around 235p and it had just confirmed that its 2015 annual dividend would be 13.4p. In other words, its stock was yielding an attractive 5.7%.

Over the past decade, the group’s share price has risen by a modest 10% to 258p and, assuming the group’s directors stick to their pledge to increase the dividend by 2%, the 2025 payout will be 21.79p, nearly 52% higher. This is equivalent to a yield of 8.4%.

Had the dividend remained unchanged, the 5.2% return would still be above the FTSE 100 average but much less than what’s currently on offer.

Getting better

Looking ahead, the group’s directors have stated that it’s their intention to increase the dividend by 2% per year over the next two years. If they do, an investor buying 1,938 shares today — at a cost of £5,000 — could generate passive income of £431 in 2026, and £439 in 2027. That’s a great return from doing very little.

And by reinvesting these dividends by buying additional shares — a technique known as compounding — it’s possible to generate even more income.

However, savvy investors know that payouts are never guaranteed. That’s because they are a distribution of profit to shareholders. If earnings come under sustained pressure, then Legal & General’s directors are likely to cut the dividend to help preserve cash.

Like anyone else with exposure to the stock market, the group’s probably experiencing large swings in the value of its investment portfolio at the moment. At 30 June 2025, it had over £500bn of equities and bonds on its balance sheet. It needs these to generate the cash required to meet its obligations to pensioners. But the ongoing Middle East conflict could be hugely damaging, if it persists for much longer. The group’s also facing increased competition from new entrants and established market players.

However, the group’s faced many similar challenges in its 190-year history. And yet it has an excellent track record in increasing its payout. It was last cut during the 2008-2009 global financial crisis. It’s also winning lots of new pension schemes to manage and its annuities business has grown on the back of higher interest rates. Also, it holds twice as many reserves as it’s legally obliged to have, which means it’s financially robust.

That’s why I have Legal & General shares in my ISA. I believe it to be an excellent dividend stock, which income investors could consider adding to their own portfolios.

The post £5,000 buys 1,938 shares in this 8.4%-yielding passive income stock! appeared first on The Motley Fool UK.

More reading

• How much income could £20k in a Stocks and Shares ISA give you today?
• Hot dates for dividend investors to mark in their March diaries
• An 8.7% forecast dividend yield! 1 of the best FTSE income stocks to buy today?
• These 3 stocks are offering passive income of 7.1%. But is there a catch?
• How a £1,000 SIPP can turbocharge passive income goals

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.

See author's posts