A Stocks and Shares ISA is still one of the most powerful ways to build long‑term, tax‑efficient wealth.
It is exempt from income and capital gains tax but also it allows withdrawals at any point, unlike private pensions. As from 6 April next year though, savers under 65 will face a 22% tax charge on interest earned from uninvested cash held within the ISA.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Nevertheless, insurance and investment giant Legal & General (LSE: LGEN) continues to offer one of the most generous, well‑covered dividends in the index. And this is backed by robust cash generation, a capital‑light business model, and a progressive dividend policy aimed at increasing returns.
So, what sort of income am I targeting here?
What does the dividend policy mean for returns?
Legal & General’s progressive dividend policy is designed to increase payouts along with growth in earnings per share. But if there is a dip in earnings, the dividend is not automatically cut — it is held steady instead.
Since 2021, it has generated respective average annual dividend yields of 6.2%, 7.8%, 8.1%, 9.3%, and 8.3%. The variation in returns despite rising payouts underlines dividend yields can go down and up alongside changes in share price.
However, all these returns are way higher than the current FTSE 100 average of 3.1% and the FTSE 250’s 3.4%.
What are the forecasts?
Analysts project the firm’s dividend yield will rise to 7.8% this year, 8% next year, and 8.2% in 2028.
In income terms, the forecast 8.2% as an average would generate £25,284 in dividends on a £20,000 holding after 10 years. This also incorporates dividend compounding being used to turbocharge those dividend returns over time.
After 30 years on the same basis, the dividends would jump to £212,146. Including the initial £20,000 stake, the holding’s total value would be £232,146 by then.
And that would pay a yearly income of £19,036!
What about share price gains too?
Historically, share prices tend to converge to their ‘fair value’ over time. And the best way I have found of identifying this value is discounted cash flow (DCF) analysis.
This works by forecasting a company’s future cash generation and converting it into today’s value. When those forecasts are less certain, the discount rate applied increases. Consequently, different assumptions here can cause varied outcomes in analysts’ DCF modelling.
My DCF analysis — including an 11.6% discount rate — shows Legal & General is 55% undervalued at its current £2.86 price.
That puts fair value around £6.36 — more than twice the present level.
So, if share prices do continue to trend to fair value, and the DCF modelling holds good (which are not guaranteed), then the £20,000 holding would be worth £44,475.
My investment view
Ultimately, share price gains and dividend rises are driven by sustained increases in a company’s earnings.
A risk for Legal & General is a sharp downturn in financial markets that could squeeze fee income. Another is tighter regulatory capital rules that could reduce free cash flow.
Nonetheless, analysts forecast the firm’s earnings will grow at a very robust annual average of 14.6% over the medium term at minimum.
Given this, I will buy more of the shares very soon. And I also have my eye on similarly deeply undervalued stocks with high yields in other sectors too.
Should you invest £5,000 in Legal & General Group Plc right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Legal & General Group Plc made the list?
Simon Watkins owns shares in Legal & General.
