Shares in UK insurer Legal & General (LSE:LGEN) are down 17% since the beginning of the year. As a result, the stock is basically trading at the level it was at five years ago.
I own Legal & General shares in my portfolio. So is the recent drop an opportunity for me to buy more? Or does the stock’s stagnant performance mean that I would do better deploying my money elsewhere?
Dividends
The first thing to note is the fact that the Legal & General share price is roughly where it was five years ago doesn’t mean that the stock has been dead money over that time.
Since May 2017, Legal & General has paid out substantial dividends to its shareholders. As a result, investors have still had noteworthy returns even without significant share price appreciation.
If I’d bought the stock five years ago, I’d have paid 250.8p per share. Since then, the company would have distributed 82.44p in dividends to me for every share I owned.Â
In other words, a £1,000 investment in Legal & General shares five years ago would have generated £328.70 in dividend payments by now. That’s a 32% return since May 2017.
There’s better news, too. The company also has a good track record of raising its distributions. With the exception of 2020 – during the pandemic – Legal & General has increased its dividend each year for the last five years.
As a result, the dividend is around 17% higher than it was in May 2017. And it’s increased again this year.
Looking ahead
In my view, Legal & General clearly has a good record of maintaining and growing its dividend. But that’s in the past. The real question for me as an investor is what it will do in the future.
When returns on investment come primarily from dividends, there’s always risk. If the company is unable to keep increasing its payments, or has to lower them, then there’s a real chance the stock could struggle as a result.
I think that the risk here with Legal & General is somewhat limited, though. There are a couple of reasons for this.
The first is that the underlying business looks to me to be in pretty good shape. The company’s total assets and shareholder equity have been growing steadily over the last few years. With this type of operation, I think that’s a very encouraging sign.
The second is that management has shown good discipline in managing its distributions to shareholders. As I noted above, Legal & General didn’t increase its dividend when there was economic uncertainty during the pandemic. That indicates to me that the company isn’t committed to raising its distributions when doing so isn’t in the best interests of the business.
Legal & General’s shares currently come with a dividend that yields around 7.5%. I think that will continue to increase over time, giving a good overall return. As a result, I’m very happy buying shares for my portfolio at these prices.