Yield matters to me as an investor because it is an indication of how much passive income I can hope to receive in dividends. If I invest £100 in a FTSE 100 share with a 3% yield, I would hope for £3 a year in dividend income. But if the yield is 6%, I would be looking at a prospective £6 per year.
Dividends are never guaranteed. But if they are paid in future, higher yielding shares could be a good way for me to get more income each year from my holdings. With £500 to invest right now, there’s one 6% yielding share I would buy in the hope of earning £30 in dividend income each year. If the dividend grows, my £500 invested today could produce even higher returns several years down the road.
6%-yielding FTSE 100 share
The share in question is Legal & General (LSE: LGEN).
The company’s multi-coloured umbrella logo is known to millions of people. As well as providing insurance, the venerable firm offers a range of financial services products. That is a lucrative business. Even though post-tax profits fell last year, they still came in at £1.3bn.
The company has been good at using profits to fund dividends. Last year it paid out over £1bn to shareholders as dividends. The dividend is covered by earnings and currently the yield is 6.1%.
The Legal & General dividend could keep rising
The company has generally increased its dividend when it can, though it fell back sharply for several years after the last financial crisis. It has set out plans to increase its dividend annually over the next several years.
For that to happen, the business needs to perform appropriately: dividends can be cut or cancelled at any time. But with its wide customer base, brand recognition, and established financial expertise, I think the outlook for earnings at Legal & General remains strong. Nor is the company resting on its laurels. Its current focus on “inclusive capitalism” could help attract new generations of customers. One of the attributes I find attractive about the financial services industry is that attracting a customer at an early stage in their life can often lead to recurring business over the course of decades.
Legal & General share price risks
Sometimes an attractive yield suggests that the City sees a share as having high risks. Is this the case for Legal & General?
One of the risks the company faces is rising claim costs. As rival insurer Direct Line flagged yesterday, the increasing cost of second-hand cars could make claims costlier. That could hurt profits at insurers such as Legal & General.
My next move on the Legal & General share price
I have held Legal & General in my portfolio previously. It’s more expensive now than it used to be, with the share price standing 25% above where it was a year ago, at the time of writing this article earlier today.
Nonetheless, for a FTSE 100 share I still regard the 6% yield as attractive. I would happily buy it again for my portfolio.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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