Here’s how much passive income £10,000 in Legal & General shares could generate

There are various ways to earn passive income from FTSE 100 shares, and one relatively straightforward strategy is to pick ones paying high dividends. I’m thinking something like Legal & General (LSE: LGEN), which at the time of writing has the Footsie’s highest forecast dividend yield at 8.3%.

It means putting £10,000 into Legal & General at that dividend rate could mean pocketing £830 per year. And as part of a diversified long-term portfolio, that could make a very nice addition to our total income. But if we reinvest the cash each year in more shares, we could potentially build it up to a fair bit more than that.

Diversified rewards

Before we plunge into a few calculations, let’s think about this level of profit. Is it realistic to aim for 8.3% per year? After all, dividends aren’t guaranteed, and they tend to rise and fall over time. Legal & General itself is in a volatile sector, which can actually suffer some pretty tough years from time to time.

That’s where diversification comes in. We really need to spread our investments across a range of stocks in different sectors. And that will reduce the risks associated with any one company or industry. But doesn’t that mean we’re also diversifying away from the stocks offering the biggest rewards?

Long-term returns

Well, the average annual return from a Stocks and Shares ISA over the past 10 years came in at 9.6%. So that’s even better than the predicted dividend yield from Legal & General. It does include share price gains as well as dividend income. But when we’re building up a passive income share portfolio, it all counts equally. It’s total returns, with dividend cash reinvested, that adds up to make our eventual retirement pot.

If we look further afield and examine annual FTSE 100 returns, the total averages 6.9% per year over the past 20 years. Aiming to equal the 8.3% predicted from Legal & General dividends does seem feasible.

Compound magic

With time we can improve on a simple one-off investment. Buying more shares with each dividend payout could more than double our cash in 10 years, to over £22,000. And that could mean £1,800 annual passive income.

What if we could stash away an extra £200 per month? That could push our total pot after a decade as high as £59,000. And 8.3% of that each year would mean a £4,900 passive income. I’ve done calculations like these hundreds of times and I know what the results come out like. But it still brings a smile to my face every time.

Stock market risk

As well as the sector risk, Legal & General’s earnings currently don’t cover the projected dividends. But they should hopefully soon be sufficient. Still, I’d say insurance stocks are best avoided unless investing for at least 10 years.

But with that proviso, I strongly rate Legal & General as one to consider as part of a diversified passive income portfolio

The post Here’s how much passive income £10,000 in Legal & General shares could generate appeared first on The Motley Fool UK.

More reading

• With an 8.6% yield, is this FTSE 100 income stock an amazing bargain or a value trap?
• How much do you need in the stock market to earn a £500 weekly second income?
• 10,000 Legal & General shares could net passive income of £8,637 a year!
• I’m taking this once-in-a-decade chance to load up on 8%-yielding Legal & General shares
• These are my 3 biggest FTSE 100 SIPP holdings. Here’s why!

Alan Oscroft 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.

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