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Legal & General (LSE: LGEN) shares have been sitting in my Self-Invested Personal Pension (SIPP) for a couple of years now, and I can’t complain about the income.
Between April and August 2023, I invested £4,000 in the FTSE 100 insurer and asset manager. It’s a modest holding but it’s generating a lovely stream of dividends. In June and September last year, I pocketed £265 and £115 respectively. I reinvested both, along with a £100 payout from September 2023. So that’s £480 in total.
Today, I hold 1,980 shares. Of these, I bought 1,779 directly and picked up another 201 through reinvested income. Over the years, that second number should overtake the first.
Legal & General’s next dividend lands on 5 June. At 15.36p per share, that’ll give me £304. At today’s share price of 240p, I’ll pick up another 126 shares.
In total, my £4,000 stake’s now worth just over £4,750, a tidy 18.75% gain. Most of that comes from dividends, not share price growth. The stock’s flat over the last year and trades lower than it did a decade ago.
Income on tap
I’m sticking with my shares and hoping for the best. But I’m also worried that I’ve been lured into a value trap. Legal & General’s 2024 results were well received at first. They included a 6% rise in both core operating profit and earnings per share. The board also announced a £500m share buyback and plans to return more than £5bn to shareholders over the next three years
New business volumes look strong too. Its Institutional Retirement arm wrote £10.7bn of new deals, including record volumes in the US and Canada. Markets also welcomed the tie-up with Japanese mutual life insurer Meiji Yasuda.
Despite all the positives, Legal & General’s share price remains stuck. Tariff volatility and constant market noise aren’t helping, and there’s another issue. When a company pays a 9% yield, the price drops sharply on ex-dividend day. That means the stock must climb back up to stand still. It’s a bit like running on the spot.
The Legal & General share price is flat over one year although, to be fair, it’s up 21% over five years, with all dividends on top. It’s not exactly shooting the lights out though.
Growth on hold
The average analyst forecast suggests a one-year share price target of 267.3p. That’s an 11.5% gain from today. Combined with that 9% yield, it implies a 20% total return. Forecasts can’t be relied upon, especially in current conditions, but that’s still a promising outlook.
Of the 15 analysts covering the stock, nine call it a Strong Buy, one says Buy, five say Hold and just one suggests a Sell. They seem content. It’s also true that drop in interest rates could also boost demand for high-yield dividend stocks like this one.
Personally, while I think Legal & General shares are worth considering, because that truly is a brilliant rate of income, it may look better still when interest rates fall, and takes down yields on cash and bonds.
But investors should consider pairing this ultra-high income stock with a spread of growth picks as well, for balance.
