I’m always on the lookout for stocks offering inflation-beating dividend for my Stocks and Shares ISA. I consider shares offering passive income a core part of my portfolio. Their dividend payments provide me with a regular and predictable source of revenue.
This is particularly true right now as inflation rates in the UK soar to levels not seen in decades. The Office for National Statistics reported this week that inflation had risen to 6.2% in February, up from 5.5% in January.
Inflation-beating dividend
This is why Legal & General (LSE:LGEN) has caught my eye recently. The FTSE 100 firm is currently offering an attractive, inflation-beating 6.7% dividend yield on the back of a 39% rise in annual pre-tax profits. And despite the recent upturn in the share price, it’s still trading at a discount compared with January. This means there could still be some further upside potential.
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The multinational financial services firm raised its dividend in early March, noting the business had benefitted from the post-pandemic economic recovery and easing of Covid-19 restrictions. Full-year accounts showed that post-tax profit was up 28% to £2.05bn, exceeding £2bn for the first time.
Legal & General’s price-to-earnings (P/E) — a ratio for valuing a company that measures its current share price relative to its earnings per share (EPS) — stands at eight, implying the business could be considered cheap. By comparison, competitor Prudential PLC has a P/E ratio of 14.2, suggesting that Legal & General, at least on face value, offers better value for money. Equally, it may mean that investors believe Prudential offers better future earning potential.
L&G risks
While Legal & General may appear cheap and offers an attractive dividend yield, there are always risks. For one, the London-headquartered firm could have a stronger dividend coverage ratio. In 2021, the dividend coverage ratio stood at 1.85, meaning the firm could pay the stated dividend nearly two times from its net income. The figure is far above the 1.26 from 2020, but a ratio above two would be healthier.
The insurer also doesn’t have a great record for share price growth, having grown less than 1% in the last year compared with the time of writing. Long-term growth has been relatively slow too. The share price is up less than 10% over the last five years. Some of this can be put down to the volatility caused by Putin’s invasion of Ukraine, which sent share prices tumbling, but in general the long-term trend isn’t overly positive.
It also seems likely that the invasion will have an impact on the company’s balance sheet as Legal & General, like many others, rushed to sell off its holdings in Russian stocks following the invasion of Ukraine.
The bottom line
Despite these issues, I still think Legal & General looks like a great buy for my Stocks and Shares ISA. I believe the firm represents good value for money, and the passive income from its dividend yield could help my portfolio navigate soaring inflation.
