Legal & General (LSE: LGEN) shares are on a forecast dividend yield of 9.4%, one of the FTSE 100‘s highest.

Analyst expectations for the next few years make things look even better. And it’s all helped by a falling share price, down 13% so far in 2024.

Dividend growth

The dividend of 21.3p per share forecast per the current year would mean a 4.8% rise on last year’s. And in these slightly saner days, that’s ahead of inflation again.

By 2026, broker forecasts show the dividend up at 22.4p. That’s another 5.2% over two years. And it could mean a whopping 10% yield.

At the end of the first half this year, the company announced a 5% rise in the interim dividend. CEO António Simões spoke of the firm’s “next phase of sustainable growth and enhanced returns“.

At 6p per share, it’s only a small part of the full-year payout. But there’s a new share buyback too. And all seems to bode well for the future of shareholder returns.

Why so high?

So why are investors allowing these potential yields to get so high?

In other words, why aren’t we all hoovering up the shares to bag ourselves a chunk of this cash bonanza? And pushing the share price up, and the dividend yield down, to more likely long-term levels?

One immediate caution comes from a look at earnings forecasts. For this year, they show earnings per share (EPS) falling well below the mooted dividend, at just 18.2p.

So earnings would only cover 85% of the forecast dividend. We should see the dividend fully covered next year, and by 2026, we could be looking at cover of 1.13 times.

Got the cash?

An uncovered dividend can be fine if a company has the cash to pay it now while expecting earnings to ramp up. And I don’t think I’d be worried by 1.13 times cover if we were going to see it this year.

But we’re surrounded by very fraught global financial markets. The company itself speaks of “the potential for external shocks to knock economies and markets off course“.

In circumstances like this, I don’t see a lot of safety here. And I feel better when I see my companies holding back more cash and ramping up their shareholder returns only when we’re sure things are back on track.

If I compare with Aviva, for example, I see a lower (but still very nice) 7.5% dividend yield. But we’re looking at cover of 1.2 times, this year.

Bottom line

Generally, I prefer a more cautious and conservative approach to cash in the companies I invest in.

Saying that, Legal & General’s business is itself more conservative that some less focused insurance firms. It’s best known for life insurance and pension risk transfer services.

And as interest rates fall and the annuity market strengthens, I can see growing demand for those services.

There’s uncertainty from the company’s plans to refocus its asset management arm, but I’m upbeat. It’s on my shortlist for my next buy.