Generating a sustainable passive income with dividend shares requires investing in quality businesses with long-term potential. And there are plenty of FTSE 100 companies that currently fit that bill. Yet, by taking on a bit of extra risk and venturing into higher-yield territory, the income-generating capabilities of a portfolio can significantly improve.

Legal & General‘s (LSE:LGEN) recently caught my attention and is one I’m considering. The insurance sector in general hasn’t had a great time of late, even with the stock market as a whole enjoying a rally in 2024. Subsequently, the shares of this industry leader currently offer prospective investors a whopping 9.4% dividend yield. And better yet, this payout’s still growing!

Considering the FTSE 100’s only averaged a 6% annualised return over the last decade, unlocking market-beating gains from dividends alone sounds quite exciting. Even more so, since all I’d have to do is buy around 5,800 shares to earn an extra £100 passive income each month, not to mention the extra income I’d earn if Legal & General continues to raise shareholder payouts.

So is Legal & General a good investment in 2024?

Impressive dividends

Since 2009, L&G’s increased dividends every year, excluding 2020, due of the pandemic. And for investors who held on throughout this period while reinvesting payouts, the returns have been quite impressive. In total, investors have earned a 585% return which, on an annualised basis, is equal to 13.7% – more than double what the FTSE 100’s delivered over the same period.

Despite this, shares of Legal & General haven’t received much love of late. And it’s not entirely unjustified. Insurance businesses of all sizes are highly susceptible to economic downturns, making it a cyclical industry. So with uncertainty surrounding inflation and interest rates, it’s not surprising that over the last few years, Legal & General shares haven’t been stellar performers.

So far, investors seemingly remain nervous, pushing the forward price-to-earnings (P/E) ratio to a mere 9.2 and the dividend yield to more than 9%. The question now becomes, is this depressed valuation warranted?

Digging deeper

In the latest interim results, operating profit came in at £849m. That was only a marginal increase versus the £844m a year ago. But rising debt costs and investment losses dragged net income down quite heavily from £377m to £223m – a 40% drop!

Pairing this with a 3% tumble in assets under management, these financials are obviously far from brilliant. Yet, from an operational standpoint, the business is making some notable progress, specifically in the UK pension risk transfer market (PRT).

2023 was a record year for PRT with Legal & General booking £4.9bn in the first half. PRT volumes in the first half of 2024 only landed at £1.5bn. However, management’s announced it’s currently sitting on a PRT pipeline that’s “larger than ever”, with £5bn of transfers having already been either written or are exclusively Legal & General’s.

In other words, the firm’s medium-to-long-term growth potential looks impressive, in my opinion. Pairing that with a steadily improving economic landscape and a cheap-looking valuation, Legal & General shares may be a worthy addition to my income portfolio when I have the cash.