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I always like to keep an eye Favorite UK shares for income. Another way I can do this is to look at what British people are buying in their Stocks and Shares ISAs. Buyers like AJ Bell or Hargreaves Lansdown periodically releases data, showing us which options are the most popular!
One name I see in almost every top 10 list Legal & General (LSE: LGEN). Why is there so much talk about this stock? The retirement and wealth management specialist is known for its high dividend yield, as well as the kind of strong income that can see income rise long into the future.
What is the income?
How much Legal & General shares are currently changing hands? On the day I write this, you would need to pay 270p for one share. The forecast dividend (over the next 12 months) is 22p which means, if all goes well, you can expect a return of 8.22% per annum.
A £10,000 stake would require 3,703 shares and would return £822 a year for nothing.
That, we hope, is only the beginning of it, of course. The real magic of investing in equity shares is finding a company that can grow dividends over the years. That means that even if we withdraw our dividends as income (rather than reinvest them) we can still see the income increase over time.
For example, Legal & General has booked an average growth rate of 4.98% in dividends over the past decade. If that trend continues, then the return on investment (on the original investment) will be 9.98% over five years and 12.73% over 10 years. Although it must be said that dividends are never guaranteed and the company may struggle to sustain above-average growth rates.
What I think
Let’s put the brakes on for a second. Being the highest dividend in FTSE 100 puts the stock in a dangerous position. Do you remember Vodafone offering a 12% yield a few years ago? That profit was not sustainable and the company was cutting back. Anyone buying with dreams of double-digit returns over the long term is now looking at an average yield of 3.36%.
Is that the case for Legal & General? One point of concern is the budget cover which at 0.96 is slightly below the benchmark one. That means that in the last financial year the company paid more in dividends than it made in profit.
While that’s problematic in the short term (or if it continues), the future looks bright for the company. Profits are set to rise in the coming years which should, if forecasts are accurate, push the profit margin to a safe level.
Are you balanced? I’m not surprised that Legal & General is the preferred income for so many. I also think it’s worth considering.
