When it comes to passive income, Legal & General (LSE:LGEN) shares are tough to beat. It’s the largest single holding in my dividend portfolio.
The company’s payout record over the last decade alone speaks for itself. In the years since 2016, the company’s dividend yield has averaged a stunning 8.1%. That’s more than double the FTSE 100 long-term average of 3%-4%.
Average annual growth of 5% has also helped investors grow their income ahead of inflation. Dividends have grown every year, the only exception being in 2020 when it froze the annual payout:
| Year | Dividend per share |
|---|---|
| 2025 | 21.79p |
| 2024 | 21.36p |
| 2023 | 20.34p |
| 2022 | 19.37p |
| 2021 | 18.45p |
| 2020 | 17.57p |
| 2019 | 17.57p |
| 2018 | 16.42p |
| 2017 | 15.35p |
| 2016 | 14.35p |
Past performance isn’t always a reliable guide to future returns though. So the question is: can Legal & General shares keep delivering market-beating, growing dividends?
Strong dividend culture
I’m confident they can. As that record shows, management’s committed to paying large and progressive dividends, and has vowed to keep this going until 2027 at least.
Its current capital allocation policy is to return £5bn to shareholders through dividends and share buybacks for 2025-2027. This includes raising dividends by 2% a year over the period.
That’s all well and good, you might say. But if another shock comes along, how well placed will Legal & General be to meet its pledge? On the basis of its enormous cash flows and huge capital reserves, I’m pretty relaxed.
Its Solvency II ratio has fallen recently, but at 210% as of December, it remained more than double what regulators require. Legal & General is also confident it can retain a strong balance sheet, saying its medium-term target operating range for Solvency II coverage is 160%-190%.
Cash machine
Legal & General is a cash machine, thanks to the regular policy premiums and product service fees it receives. And unlike many other dividend-paying shares, its operations are extremely ‘capital light’, so it can distribute more of this cash to shareholders if it sees fit.
Encouragingly for dividend investors, the firm’s simplification plan — which includes merging divisions and growing its fee-based businesses — is further strengthening its capital efficiency. It’s the reason why it has those impressive Solvency II targets.
This sets the company up well for the longer term. Other reasons I’m excited about future dividends is the firm’s market-leading position in segments enjoying exponential growth (including pension risk transfer — or PRT — and asset management). Its diversified model across product lines and different regions also underpins reliable dividends.
The best dividend stock out there?
Buying any stock for dividends comes with risk. And in the case of Legal & General, payouts could underwhelm further out if competitive pressures rise, putting revenues and margins under strain. There’s also the possibility dividend growth could be impacted during economic downturns.
Yet I’m still convinced Legal & General’s one of the FTSE 100’s best dividend shares to consider.
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Royston Wild owns shares in Legal & General.
