It’s the start of 2025 and many investors will be turning to dividend shares in the hope of building a long and lasting passive income machine.
Legal & General (LSE:LGEN) shares are a great way to achieve this. With an eye-watering dividend yield of 9.2%, it’s one of the highest-yielding shares on the FTSE 100 index.
However, the company has endured a miserable 2024 on the UK stock market. After shedding 9.3% of its share value over the year, it easily underperforms the Footsie’s return of 5.4%.
But sharp-sighted income investors will understand that this isn’t such a terrible thing. If the dividend is an important part of one’s investment thesis, it means the cost to obtain the future stream of dividends is now 9.3% cheaper than it was a year before.
Building a passive income machine
Before I discuss how an investor could generate additional income by owning Legal & General shares, I want to make it clear that dividends are never guaranteed and investors should be mindful of this.
With that said, let’s assume we have £20,000 in savings (I appreciate that this is a large amount of cash and that investors wouldn’t want to unbalance their portfolio) to buy the company’s shares at the current price of 225.40p for each.
An investor could therefore buy 8,873 of its shares.
Looking back at the previous 12 months, the insurance firm has paid dividends of 20.63p. That means the shares would give an additional income of £1,831 annually and £153 on a monthly basis.
This second income is likely to grow over time too, because looking at Legal & General’s website, it’s stated that the board plans to grow the dividend by 2% annually until 2027. Furthermore, if investors reinvested their dividends back into the company’s shares, they could accelerate their dividend growth over time.
While the insurance firm looks like a great option for income investors, there are other things to like about it. This is because the company has a strong solvency ratio of 223%, showing its financial stability. Moreover, its shares are trading at a low valuation, with a forward price-to-earnings (P/E) ratio of 9.4. Given that the firm expects to grow its operating earnings per share (EPS) at a compounded annual growth rate (CAGR) of 6%-9% until 2027, I believe its shares represent great value.
Risks
Legal & General presents a compelling second income opportunity. However, as an insurance business, the company’s shares are infamously cyclical. This is because its performance is usually tied to that of the general economy.
Right now, there’s lots of pessimism surrounding the UK economy. There was no growth between July and September, with the economy shrinking in October. Furthermore, inflation is back on the rise and some are even speculating about a potential recession in 2025.
This could lead to many people deciding not to take up investments or insurance products, which could hurt the company’s earnings. Investors who are considering Legal & General shares should be mindful of this.
This post was originally published on Motley Fool
