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The insurer Legal & General (LSE: LGEN) is known to millions to people thanks to its multi-coloured umbrella logo. But a lot of investors know the insurer for a different reason: its dividend income. With a 7% yield at the moment, I think there is a lot to like about the Legal & General dividend. That is why I would consider adding the shares to my portfolio.
Here are three positive points I see.
A 7% yield is not the highest among FTSE 100 shares, but it is well above average. What I think sets the Legal & General dividend apart from some higher yielders is my expectation that it can likely sustain its dividend in future. It is not in a cyclical industry like Rio Tinto, for example.
The dividend was well-covered by earnings last year, with coverage of about 1.9 times. From a cash flow perspective, things looked less good last year. Dividends cost the company £1.1bn, leading to negative cash flows of £1.5bn once they were paid. But that figure reflects swings in cash flows due to the company’s financial business seeing changes in asset values. The prior year, for example, free cash flows came in at £3.8bn even after paying dividends. In the long term, I see Legal & General as a cash generative business, which is good for future dividend prospects.
Strong growth prospects
Dividends ultimately require a profitable business. I like what I see as the strong foundations of the Legal & General dividend in this regard.
Last year, profit topped £2bn. That reflects a number of factors I think could continue working in the company’s favour. One is its strong brand, which helps attract new business. Another is the firm’s focus on potentially large markets. Both insurance and investment management are massive markets in which Legal & General can make sizeable revenues. I expect these markets to see continued strong demand in future.
That could be good news for me in more ways than one if I bought the shares. Not only might I benefit from a meaty Legal & General dividend, any business growth may also help boost the share price.
However, there are also some risks that could hurt both revenues and profits at the firm. A recession could lead to falling revenues as investors put less money into financial services products. Rising claims costs combined with renewal pricing regulation might also push down profitability in the insurance operation.
The Legal & General dividend is set to grow
Legal & General has occasionally suspended or even cut its dividend. For example, it held its dividend steady for 2020. But in general, the company has tried to increase its annual payout. It has said that between 2021 and 2024, its aim is annual dividend growth in low to mid-single percentage digits.
Is that guaranteed to happen? No. No dividend is ever guaranteed. But Legal & General is a strong business and has set out its progressive dividend strategy clearly. I therefore expect management will try hard to deliver it.
The Legal & General dividend policy and payout potential attracts me. That is why I would consider buying the shares for my portfolio at their current price.