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Does a dividend yield of 9.1% sound like the stuff that long-term passive income is made of? That’s what Legal & General (LSE: LGEN) is forecast to pay this year. What’s more, analysts expect it to grow progressively between now and 2027 — which is as far ahead as they look.
Imagine being able to invest a full £20,000 Stocks and Shares ISA allowance in it. And not having to pay a penny tax on any gains when we take it out — no matter how much we accumulate. That could certainly help our retirement plans.
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Banking on dividends
The first thing I have to point out is that dividends are never guaranteed. They can be a bit up and down in the insurance business particularly, which can be very cyclical. But there’s a couple of things those investing in passive income can do to reduce the risk.
One is to stick with it for the long term. Legal & General hasn’t cut its annual payment in the past decade. And with first-half results in August, CEO António Simões said: “We are delivering on our promise to return more to shareholders with over £5bn in dividends and share buybacks over three years.“
Buybacks should help boost Legal & General’s future per-share dividend cash, with fewer shares to spread it across.
I’d also never put all my eggs in one omelette. So I see diversification as essential, especially across different sectors. While Legal & General’s high on my list of candidates now, there are plenty of other high-yield stocks on the FTSE 100 and FTSE 250 to choose from.
Share price risk
None of us likes it when our share prces fall, right? Well, I do — providing it’s not a fundamental problem with the company.
I buy more shares with my dividends each year — so I should want future prices to be lower. I mean, we don’t hope the Christmas sales will end early so we can pay more, do we?
As for finally selling my shares some day? My plan is to just keep taking dividend income throughout my old age. My family can worry about share prices after I no longer care.
The magic of compounding
My headline £1,820 in the first year is a nice start. But every year we buy more shares with our dividends, the more cash we’ll rake in the next year. In year 10, our holdings could generate £3,986 in dividends. And the initial £20k investment could have more than doubled to £43,798 — without adding a single extra penny.
This is all assuming a steady dividend yield from a single stock. In reality, we should expect a mix of dividends from a range of stocks, and they’ll vary year by year,
Each of us will be able to invest different amounts too — not many have £20k to spare. But I do hope this might inspire folks to think about investing as much as possible each year into a range of UK dividend stocks. And I think Legal & General is a good one to consider as part of it.
