Image source: Getty Images
Legal & General shares (LSE: LGEN) remain one of my best holdings for generating dividend income. These already provide me with a better standard of living than I would otherwise have. And I aim to increasingly live off the proceeds while reducing my weekly working commitments.
My only regret is that I did not start investing in such shares even earlier than I did. The more time money has to work in an investment, the greater the opportunity for increased returns.
This also allows for the smoothing out of shorter-term pricing shocks in individual shares and the markets.
Serious dividend income growth
In 2023, Legal & General paid 20.34p a share in dividends. This yields 8.7% on the current share price of £2.35.
So, a 20-year-old investing £5,500 (half the average UK savings amount) in the stock now would make £479 in dividends in year one.
If the yield averaged the same, then after 10 years this would rise to £4,790. And by the time the investor was 50, the dividend income would have increased to £14,370.
This is clearly much more than could be made from a standard UK savings amount,, although it is not guaranteed, unlike interest on savings.
Supercharging those returns
The annual dividend income could be turbocharged using the standard investment practice of dividend compounding. This simply involves reinvesting the dividends paid by a stock straight back into it.
Doing this with the £5,500 Legal & General holding at an average 8.7% would generate £7,587 in dividends after 10 years, not £4,790. And on the same basis, this would have risen to £68,594 after 30 years, rather than £14,370.
Adding in the initial £5,500 investment and the total Legal & General holding would be worth £74,094 by then. So, by the investor’s 50th birthday, this would be generating an annual dividend income of £6,446!
How do the dividend forecasts look?
Earnings growth is ultimately what powers a firm’s dividend (and share price) higher over time.
Analysts forecast that Legal & General’s earnings will increase by a stellar 23.5% a year to end-2027.
Cut-throat competition in the financial services sector may squeeze its earnings and profit margins, of course. Another risk to these is a spike in the cost of living that may prompt some customers to cancel policies.
However, analysts forecast that the firm will pay dividends of 21.8p in 2025, 22.3p in 2026, and 22.6p in 2026.
Based on the current share price, these would generate respective yields of 9.3%, 9.5% and 9.6%.
A potential share price bonus
All my dividend stocks were bought at levels that looked very undervalued to me. This reduces the chance of my making a loss on the share price if I had to sell the stock.
Conversely, of course, it increases the chance that I would make a profit if I had to liquidate the holding.
In Legal & General’s case, a discounted cash flow analysis shows the stock is 61% undervalued at its present £2.35. So, the fair value for the shares is technically £6.03, although they may not reach that level. At the same time, they could go much higher.
Anyhow, given its stunning earnings growth potential and what this could mean for share price and dividend growth, I will be buying more of the stock very soon.
