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I bought £10,000 of Legal & General (LSE: LGEN) shares in June 2020, principally for their passive income potential.
This is money made with little effort, most appositely in my view with dividends paid by shares. The only real work on my part is selecting the stocks in the first place and then monitoring their progress.
I had already built up a stake in the financial services giant over previous years, in increments of £5,000. However, given how well it had performed – and its forecast earnings at that point – I decided to double my holding.
After all, earnings are the key driver for any firm’s share price and dividends over time.
Looking back I am very happy with my decision.
How much dividend and other income have I made?
In Legal General’s case, my £10,000 bought me 4,545 shares at the 24 June 2020 opening price of £2.20.
Since then the firm has paid a total of 97.09p in dividends. This has given me £4,413 in dividends – a return of 44% over the five years.
In addition, I have made a profit on a rise in the share price too. This was not altogether unexpected, as I only buy stocks that look significantly undervalued to me.
The primary aim of this in my passive stocks is to minimise the risk that I lose dividend gains through share price losses. However, it also conversely increases the chance that I may make a profit on the share price as well.
This has been the case with Legal & General, which now trades at £2.52. It gives me an additional profit of £1,454 on the share price.
This, added to the dividends made, means a total profit of £5,867 over the five-year period – a near-60% return.
What’s the dividend income outlook?
A risk for Legal & General is the intense competition in its sector, which may squeeze its margins.
That said, consensus analysts’ estimates are that its earnings will grow a spectacular 27.9% a year to end-2027.
The forecasts are that the firm’s dividends will rise to 21.8p this year, 22.3p next year, and 22.6p in 2027. This would generate respective yields on the current share price of 8.7%, 8.9%, and 9%. The dividend for 2024 was 21.36p, giving the current yield of 8.5%.
If the shares averaged this 8.5% yield over the next 10 years, then my £10,000 would make £13,326 in dividends. And if it averaged the same over 20 years I would make £44,412.
This is based on me reinvesting the dividends into the stock – known as ‘compounding’. But I have to take into account that none of this is guaranteed.
What about the share price prospects?
Legal & General shares continue to look extremely undervalued to me.
More specifically, a discounted cash flow analysis shows they are 56% undervalued at their current £2.52.
Therefore, their fair value is technically £5.73.
Consequently, given its strong earnings prospects – and what this should mean for its share price and dividends — I will buy more of the shares very soon.
