In 2023, Legal & General (LSE: LGEN) shares came with a dividend of 20.34p. This yields 9% on the current £2.26 share price. It is two-and-a-half times the FTSE 100’s average of 3.6% and nearly triple the FTSE 250’s 3.3%.
Around £11,000 is the average amount of savings in the UK. Investing this in the shares would make £990 in the first year. After 10 years on the same average yield, another £9,900 would be made. After 30 years, the figure would be £29,700.
Yields go down as well as up, of course, depending on share price moves and changes in annual dividend payments.
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Supercharging the returns
Nine percent is a lot better than can be made in a UK bank account right now. But it could be even more if the dividends are used to buy additional Legal & General shares.
Using this ‘dividend compounding’ method would make an extra £15,965 instead of £9,900 after 10 years. The total investment pot of £26,965 (including the initial £11,000) would pay £2,427 a year in ‘passive income’. This is money made with minimal effort, as with dividends from shares.
After 30 years on an average 9% yield, the additional amount would be £151,036 rather than £29,700! The total £162,036 investment pot would pay £14,583 a year in dividend income.
Making more with no existing savings
It is not true that investing in shares requires a sizeable amount of money to begin with.
The average cost of a pint of lager in the UK is £4.78, according to the Office for National Statistics. That amount a day (£143.40 a month) invested and compounded in Legal & General shares would accumulate into £27,958 after 10 years. This would pay £2,516 each year in passive income on a 9% average yield.
On the same provisos, the total investment pot would be £264,498 after 30 years. This would be generating yearly dividend payments of £23,805!
I like a beer as much as the next person. But one less is never a bad idea and in this case it could be stunningly beneficial.
How does the business look?
As a financial services and asset management firm, Legal & General is not without risks. A resurgence in the cost-of-living crisis might cause clients to withdraw funds and/or cancel policies.
A similar reaction may occur if financial market jitters returned, as they did in the mini financial crisis of March/April 2023.
However, at its Capital Markets Event on 12 June, it announced it is targeting a compound annual growth rate of 6%-9% in its core operating earnings per share to 2027.
It is also aiming for an operating return on equity of 20%+ by that time. And it intends to generate £5bn-6bn in a cumulative Solvency II operational surplus by then.
Rises in earnings tend to drive gains in share price and dividends over time.
Will I buy the shares?
I have owned Legal & General shares for years and have made a lot of passive income from them. I think this is set to continue, so if I did not already own them I would buy them today.
