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I have held Legal & General (LSE: LGEN) shares for more years than I care to remember. Nevertheless, over that time they have delivered consistently high dividend yields.
They remain a key part of my passive income portfolio designed to generate high returns for me. These have not only given me a far better lifestyle over the years than I would have enjoyed otherwise. But they should also allow me to keep reducing my working commitments as and when I choose.
Investors taking the same step even five years ago using the £11,000 UK savings average would also have done very well.
Five-year historical performance
The opening price of the stock on 4 June 2020 was £2.29. So, the £11,000 investment would have bought 4,803 shares.
The opening price today is £2.54. This means a profit on the share price of £1,200.
However, the share price gains are the least of the returns story in this high-yielding stock. Respectively starting from 2020, it paid dividends of 17.57p, 18.45p. 19.37p, 20.34p and 21.36p in 2024.
The total of 97.09p means the 4,803 shares would have made an additional – dividend – profit of £4,663!
Adding in the £1,200 share price gain and the absolute profit is £5,863 – or a 53% return over the period.
What do the next five years look like?
A risk to the FTSE 100 financial services and asset management business is any surge in the cost of living. This could cause customers to cancel policies.
However, consensus analysts’ estimates are that its earnings will increase by a stellar 28% a year to end-2027. This growth is what ultimately drives a firm’s share price and dividends over time.
And there is enormous scope for price gains given how far below fair value the stock is, in my view. Specifically, a discounted cash flow analysis shows the stock is 56% under fair value at the current price of £2.54.
Therefore, the fair value for the shares is technically £5.77.
Meanwhile, its dividends are forecast to rise to 21.8p this year, 22.3p next year, and 22.6p in 2027. These would give respective yields on the present share price of 8.6%, 8.8%, and 8.9%.
What dividend income could be made?
Even assuming no rise from the current 8.4% yield, £11,000 invested now would make £924 in dividends this year.
Over five years of the same, the amount would increase to £4,620.
However, if the dividends were reinvested into Legal & General shares – known as ‘dividend compounding’ – it would be much more.
Specifically, the total dividend amount would rise to £5,717. Adding in the initial £11,000 stake and the total value of the holding would be £16,717.
This would generate an annual dividend income of £1,404 on the same 8.4% yield.
Looking further forward to 10 years, the dividends would increase to £14,406, and after 30 years to £124,520. These figures are also based on the same 8.4% average yield, and dividend compounding. At that point the annual dividend yield would be £10,460! Of course, none of this is guaranteed.
But given the extremely strong earnings growth prospects and what this may mean for the share price and dividends, I will buy more of the shares soon.
