In 2023, Legal & General (LSE: LGEN) shares paid a dividend of 20.34p, yielding 9% on the current £2.24 price.
At its June Capital Markets Event, it announced a 5% increase in the dividend for 2024. It added that it will increase the payout by 2% a year afterwards.
To compensate shareholders for the lower future dividend rises, it will undertake a £200m share buyback this year. And it intends to buy back the same amount each year to 2027. Buybacks tend to support share price gains.
Based on these pledges, the FTSE 100 financial services firm will pay dividends of 21.36p this year, 21.78p in 2025, and 22.22p in 2026.
These would respectively yield 9.5%, 9.7%, and 9.9% on the present share price.
By comparison, the current average yield of the FTSE 100 is just 3.5% and of the FTSE 250 only 3.3%.
Ultimately, a firm’s dividend (and share price) are driven by its earnings growth over time. A primary risk here for Legal & General is cut-throat competition in its sector might squeeze its margins.
However, as it stands, consensus analysts’ estimates are that its earnings will increase by a whopping 28% each year to end-2026.
How much passive income could I make?
£11,000 (the average UK savings) invested in Legal & General stock now would make £990 in ‘passive’ income this year. This is money made with little effort, such as dividends paid by shares.
Over 10 years on the same average yield this would rise to £9,900 and over 30 years to £29,700.
Crucially though, the returns could be much more than this using ‘dividend compounding’. This involves using the dividends received to buy more of the stock that paid them. It is a similar idea to leaving interest to accumulate in a bank savings account.
Doing this on the same 9% average yield would produce £15,965 in dividends after 10 years, not £9,900. And over 30 years on the same basis the returns would have grown to £151,036 instead of £29,700.
Adding the initial £11,000 investment and the Legal & General holding would be making £14,583 a year in dividends by then, or £1,215 each month!
What if I had £0 savings in the bank?
All would not be lost if I had nothing saved in my bank account – far from it.
Given the price of a beer or a fancy coffee nowadays, simply foregoing one and using the money to invest could be the start of something big.
Specifically, £5 a day (£150 a month) invested in 9%-yielding Legal & General shares would generate £11,245 of dividend payments after 10 years. Add in the £18,000 in deposits from one beer or coffee a day not drunk and the holding would be worth £29,245 at that point.
After 30 years of doing the same on the same 9% average yield, the shareholding would be worth £276,671!
By that time, it would be paying me £24,900 a year in passive income, or £2,075 every month.
Will I buy it?
I already own the stock, based on its stellar earnings growth prospects that should push the share price and dividend higher.
As nothing has changed here for me, I will be buying more shares very soon.
This post was originally published on Motley Fool
