In 2023, Legal & General (LSE: LGEN) shares came with a dividend of 20.34p. This yields 9% on the current £2.26 share price. It is two-and-a-half times the FTSE 100’s average of 3.6% and nearly triple the FTSE 250’s 3.3%.
Around £11,000 is the average amount of savings in the UK. Investing this in the shares would make £990 in the first year. After 10 years on the same average yield, another £9,900 would be made. After 30 years, the figure would be £29,700.
Yields go down as well as up, of course, depending on share price moves and changes in annual dividend payments.
Supercharging the returns
Nine percent is a lot better than can be made in a UK bank account right now. But it could be even more if the dividends are used to buy additional Legal & General shares.
Using this ‘dividend compounding’ method would make an extra £15,965 instead of £9,900 after 10 years. The total investment pot of £26,965 (including the initial £11,000) would pay £2,427 a year in ‘passive income’. This is money made with minimal effort, as with dividends from shares.
After 30 years on an average 9% yield, the additional amount would be £151,036 rather than £29,700! The total £162,036 investment pot would pay £14,583 a year in dividend income.
Making more with no existing savings
It is not true that investing in shares requires a sizeable amount of money to begin with.
The average cost of a pint of lager in the UK is £4.78, according to the Office for National Statistics. That amount a day (£143.40 a month) invested and compounded in Legal & General shares would accumulate into £27,958 after 10 years. This would pay £2,516 each year in passive income on a 9% average yield.
On the same provisos, the total investment pot would be £264,498 after 30 years. This would be generating yearly dividend payments of £23,805!
I like a beer as much as the next person. But one less is never a bad idea and in this case it could be stunningly beneficial.
How does the business look?
As a financial services and asset management firm, Legal & General is not without risks. A resurgence in the cost-of-living crisis might cause clients to withdraw funds and/or cancel policies.
A similar reaction may occur if financial market jitters returned, as they did in the mini financial crisis of March/April 2023.
However, at its Capital Markets Event on 12 June, it announced it is targeting a compound annual growth rate of 6%-9% in its core operating earnings per share to 2027.
It is also aiming for an operating return on equity of 20%+ by that time. And it intends to generate £5bn-6bn in a cumulative Solvency II operational surplus by then.
Rises in earnings tend to drive gains in share price and dividends over time.
Will I buy the shares?
I have owned Legal & General shares for years and have made a lot of passive income from them. I think this is set to continue, so if I did not already own them I would buy them today.
The post £11,000 of Legal & General shares could make me £14,583 a year in passive income! appeared first on The Motley Fool UK.
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Simon Watkins has positions in Legal & General Group Plc. 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.
