Dividend yield matters to me as an investor. If I can find a share that typically pays out a high dividend relative to its price, I consider adding it to my list of passive income ideas.
One FTSE 100 share that is a household name currently yields over 6%. I explain below why I would consider picking this share now to add an income boost to my portfolio.
Well-known financial services brand
The share in question is Legal & General (LSE: LGEN).
I probably don’t need to introduce the company – which is part of its appeal to me. The financial services provider has widespread recognition in the UK. It has been doing business since before Queen Victoria ascended to the throne. Today its multicoloured rainbow logo remains instantly identifiable.
That sort of brand recognition is valuable, in my view. It enables the company to attract more customers without having to spend heavily to build brand awareness.
I also like the spread of businesses the company offers. Its insurance business is well-known, but it does a lot more than just provide insurance. It also has investment, retirement, and life cover lines of business. That positions it well to benefit from any future growth in the broad financial services industry.
Legal & General dividend yield
Currently the company yields 6.3%. it does not have to stretch its balance sheet to do so. Last year amid the pandemic, insurers such as Aviva cancelled their dividend. But Legal & General paid its dividend and more than covered it from basic earnings alone.
The company has also set out its plans for the dividend in coming years. A dividend is never guaranteed, so it is worth emphasising that at this stage these are only plans. The company has had a year where it keeps the dividend flat. After that it expects to grow the dividend annually at low- to mid-single digits. That is not a high rate of growth, but it is still growth. Plus it is on top of an already attractive dividend yield.
A simple business
Financial services isn’t a simple industry in which to operate. But as an investor, I find the appeal of the Legal & General business to be the straightforwardness of its business plan.
It has positioned itself in an industry – financial services – which I think has a good future. Demand for pensions isn’t going to stop any time soon, for example. It has a strong brand and a clear geographic focus. Along with its business experience, that helps it operate efficiently and profitably. Last year, for example, on revenue of £12.5bn, it recorded a pre-tax profit of £1.5bn.
I don’t see Legal & General as a good choice for me if I want a growth business. But from a dividend yield perspective, I like the shares.
Risks with Legal & General
Like all shares, there are risks. Financial services provision occasionally suffers from price wars that can damage profitability for large providers such as Legal & General.
The company is also heavily exposed to the financial markets. So a significant downturn in financial markets can cut its revenue and profits as nervous investors pull savings out.
We think that when a company’s CEO owns 12.1% of its stock, that’s usually a very good sign.
But with this opportunity it could get even better.
Still only 55 years old, he sees the chance for a new “Uber-style” technology.
And this is not a tiny tech startup full of empty promises.
This extraordinary company is already one of the largest in its industry.
Last year, revenues hit a whopping £1.132 billion.
The board recently announced a 10% dividend hike.
And it has been a superb Motley Fool income pick for 9 years running!
But even so, we believe there could still be huge upside ahead.
Clearly, this company’s founder and CEO agrees.
christopherruane has no position in any of the shares mentioned. 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.
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