Legal & General (LSE: LGEN) shares came with a total dividend of 20.34p last year. This yields 8.9% on the present share price of £2.28. It is more than double the current FTSE 100 average payout of 3.7%.
So investing £10,000 in the stock would make £890 in the first year. After 10 years, given the same average yield, a further £8,900 would be made. After 30 years, the figure would have risen to £26,700.
Turbocharging the dividend returns
This is much more than could be made in a bank savings account. But if the dividends were used to buy extra shares, an even bigger return could be generated.
By using this ‘dividend compounding’ method, an additional £14,271 would be made after 10 years, rather than £8,900.
The total investment would be worth £24,271 (adding in the initial £10,000) which would pay £2,160 annually in ‘passive income’. This is money made with little daily effort, as with dividends paid from shares.
After 30 years on an average 8.9% yield, the extra money made would be £132,984 rather than £26,700! The total investment of £142,984 would pay £12,726 a year in dividend income.
High income from a £0 in the bank start
There is a common misconception that stock investment requires sizeable sums of money at the outset. This is not true at all.
For the price of a fancy coffee or a pint of lager, life-changing passive income can be generated over time.
Specifically, £5 a day (£150 a month) invested in Legal & General shares would grow into £29,078 after 10 years, using dividend compounding. This would pay £2,606 each year in passive income on an 8.9% average yield.
On the same basis, the total investment pot would be worth £270,951 after 30 years. This would generate annual dividend payouts of £24,115!
Does the business look strong?
Of course, this is based on assumptions of no events to undermine Legal & General’s payouts or dent its share price. None of that is guaranteed. All businesses have risks and one here is intense competition in the financial services sector. This may pressure margins over time.
However, H1 2024 results released on 7 August showed core operating profit rising to £849m from £844m in H1 2023. Core operating earnings per share increased to 10.58p from 10.52p, and operating return on equity jumped to 35.4% from 28.6%.
Consensus analysts’ estimates are that the firm’s earnings will grow 26.2% each year to end-2026. Earnings per share are expected to increase 25.4% a year to that point. And return on equity is forecast to be 33.6% by that time.
Boosting shareholder rewards
Growth in earnings powers increases in a company’s share price and dividends over time. In its most recent results, Legal & General increased its first interim dividend for 2024 by 5% — to 6p from 5.71p.
Analysts forecast that its dividend yield will rise to 9.5% in 2024, 9.8% in 2025, and 10% in 2026.
The firm also announced a £200m share buyback this year. These programmes tend to support share price gains.
Will I buy the shares?
Legal & General is one of the first shares I ever bought, and it has paid me a lot of dividends over the years.
This looks set to continue in my view, so I will buy more very shortly.
This post was originally published on Motley Fool
