Looking at the FTSE 100, I see a handful of sky-high dividend yields right now. The forecast yield for British American Tobacco is above 10% and I expect the firm to meet it. That would sure turbocharge any investor’s passive income portfolio!
However, my favourite dividend stock is diversified financial services group Legal & General (LSE: LGEN).
After a 23% share price recovery since October, it’s not in double-digit yield territory any longer. But it still pays out the sixth biggest on the Footsie at 7.7%. And this rises to 8.4% this year, if brokers have it right.
Here’s why I rate it highly.
Passive income generation
First, I’ll take a look at how much income could be on offer from Legal & General.
The share price is currently 254p and the full-year dividend is 20.3p per share. According to forecasts, the payout is expected to rise to 21.4p this year.
For me to receive £1,500 each year then, I’d need to invest around £17,850 into this FTSE 100 stock. That amount would bag me 7,027 shares at today’s market price.
The insurance and asset management firm typically pays out every June (the final dividend) and September (the interim).
A great track record
All this sounds great so far, but successful dividend investing is about securing a growing income year after year. How do I know Legal & General won’t reduce this dividend or even cancel it altogether?
The short answer is that I don’t. Dividends can be cancelled at any time, as happened across many sectors during the financial crisis and global pandemic.
However, there are a few things that give me confidence in this stock’s ability to pay out. Firstly, the company has a tremendous track record of dividend growth stretching back many years.
Indeed, there was no interruption to shareholders’ income during the highly uncertain period of the pandemic. The dividend has risen by 31% since 2017 and is generally well-covered by earnings.
Second, its investment management division is set to benefit from interest rate cuts this year (assuming they happen). This will improve investor sentiment and its assets under management could rise, allowing it to book higher management fees.
Finally, the firm has a new CEO, António Simões, who started this year This does present risk to the dividend in case he wants to preserve cash in order to invest in new growth areas. But I doubt he’ll immediately take the axe to the dividend as that could destroy trust and credibility with income investors.
I will buy more
At its current level, the Legal & General dividend is twice that of the average FTSE 100 yield of 3.9%.
It also promises more than any savings account and is set to pay out at a rate higher than inflation, which has ticked up slightly and may continue doing so with troubles in the Red Sea and elsewhere.
While the stock is one of my top holdings, I’ll keep buying more shares whenever I have spare cash. But I’ll probably continue reinvesting the dividends, which should boost my passive income further in the long term.
