The insurance and financial services company Legal & General (LSE: LGEN) has certain attributes I like in an income share. For example, the company is a cash generation machine — and I think it potentially has a strong profit outlook in coming years. The Legal & General dividend yield has been rising and now stands at 7.4%.
Here is why I find that attractive and would consider the shares as a possible addition to my portfolio.
Growing yield
Dividend yield is determined by two things – a company’s share price and the amount of its dividend.
Over the past year, the Legal & General share price has fallen by 13%. While that might not sound positive for shareholders, it has had the effect of pushing up the yield I could expect if I bought the shares today compared to 12 months ago.
On top of that, the Legal & General dividend has been growing. Last year’s payout of 18.45p was 5% higher than the previous year. That was a smaller increase than in the most recent few years before the pandemic. But it is still an increase. Indeed, the firm has set out a dividend strategy that aims for low to mid-single digit percentage growth in the dividend over the coming years.
Legal & General dividend safety
It is all very well to try and grow a dividend. But to do that sustainably a business needs to perform in the right way too. The strategy sets an ambition of cash and capital generation significantly exceeding the cost of dividends, as well as growing earnings per share faster than dividends.
The Legal & General dividend is already comfortably covered by earnings. Last year’s dividend coverage stood at 1.9 times. The strategy’s focus on maintaining a comfortable cash cushion is reassuring. Dividends are never guaranteed. But if Legal & General can deliver on its strategy then I think its dividend could keep growing in future, as it has done in 17 of the last 20 years.
Rewards and risks
A 7.4% yield from a blue-chip FTSE 100 company with the prospect of dividend growth is definitely attractive to me. I think the company has assets that could help it deliver on its vision for business growth, including an iconic brand, large existing customer base, and deep experience of pricing insurance risks profitably.
But there are some risks ahead too. In two of the past 20 years, the dividend was reduced. Both cuts followed the last financial crisis. A worsening economic environment and turbulent stock market are once again a risk to profits at the firm as they were back then. Alongside rules introduced this year on renewal pricing, customers looking for the best deal could also lead to profit margins falling in the insurance business.
My move on the Legal & General share price
Nobody knows what will happen next to the Legal & General share price. But right now I can get a prospective 7.4% dividend yield by buying the shares for my portfolio at the current price.
That already looks like an attractive income opportunity to me. I would happily consider adding shares in this blue-chip business to my portfolio.