Thinking of buying Legal & General shares for the 9% dividend yield? Read this first

Legal & General (LSE: LGEN) shares are a very popular investment. It isn’t hard to see why – they offer a dividend yield of around 9.2% today.

However, if you’re considering investing in the insurance giant, there are some risks to be aware of. Here are some things to know about the FTSE 100 stock and its massive yield.

Is the yield too good to be true?

When a stock offers a monster dividend yield, it can be a signal that the market sees the dividend payout as unsustainable. Big institutional investors (the ‘smart money’) may have bailed on the stock, pushing its share price down and its yield up.

Now, zooming in on Legal & General, the issue of payout sustainability is starting to come into focus. Because the company’s earnings are no longer covering the dividend payout (for 2025 earnings per share were 20.93p while dividends per share were 21.79p).

This issue was brought up by analysts at UBS recently. They argue that Legal & General’s currently paying out more than it can afford, noting that earnings are unlikely to cover the dividend between now and 2030.

Worryingly, the UBS analysts – who currently have a 250p price target on the stock – pointed out that in a severe market stress scenario, Legal & General’s solvency ratio (an important measure of financial health for insurers) could fall dramatically. This could result in the company having to reduce its dividend payout to bolster its balance sheet.

Could the share price fall?

Now, UBS isn’t the only broker that has some concerns about the shares right now. Another is RBC Capital. Last week, it cut its earnings forecasts for the insurer and reduced its price target to 220p. That’s obviously below the current share price.

If the stock was to fall to that level, investors could see any dividend income offset by share price losses. That’s not ideal.

RBC’s analysts – who have an Underperform rating on the stock – are worried about the company’s momentum in the pension risk transfer market (where insurers take on the corporate pension liabilities in exchange for a premium). It sees competition increasing here as several rivals are aggressively trying to capture market share.

Still worth considering?

Now, just because these two brokers have expressed some concerns about the stock and its dividend doesn’t mean it isn’t worth considering. If an investor’s comfortable with the risks here – which include share price weakness and lower-than-anticipated dividend income – it could still be worth a look, given the high yield currently on offer.

I’ll point out that the company’s valuation is quite reasonable. Currently, the forward-looking price-to-earnings (P/E) ratio is under 10.

This isn’t a stock I’d take a large position in however. While the dividend yield looks attractive today, there are definitely some risks under the surface and investors may see the payout cut in coming years.

In my view, there are much safer income stocks in the market today.

The post Thinking of buying Legal & General shares for the 9% dividend yield? Read this first appeared first on The Motley Fool UK.

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Edward Sheldon has no positions in any 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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