Can I really make this much passive income from £11,000 invested in this FTSE dividend superstar?

Can I really make this much passive income from £11,000 invested in this FTSE dividend superstar?

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.

Image source: Getty Images

Since I turned 50 a while back, I have focused on FTSE shares that pay high dividends. This is because I want to increase my passive income so I can further reduce my working commitments.

Passive income is money made from minimal daily effort, allowing me more time to do other things.

One of the earliest shares I bought (around 35 years ago) was Legal & General (LSE: LGEN). I did not know back then what passive income was. But I liked the idea of dividend payments just rolling into my bank account.

I still do, and I regard the FTSE 100 asset manager as one of the best companies for generating high passive income.

How much can be made?

Currently, it pays a dividend that gives me an 8.4% return on my money. So, if I was starting out again now with maybe £11,000 (the average UK savings amount) that would make me another £924 this year.

If, as when I was younger, I withdrew this dividend every year, I would make £9,240 after 10 years. That is providing this 8.4% yield averaged the same over the period. Yields do vary as share prices and dividend payouts change.

What I found out (early on, thankfully) was how much more I could make if I reinvested the dividends back into the stock. This is known as ‘dividend compounding’ and is the same principle as compound interest in a bank account.

Using dividend compounding, after 10 years at an 8.4% average yield, I would have £25,406 instead. This would pay me £2,040 of passive income each year, or £170 every month.

After 30 years of doing this, I would have £135,520, paying me £10,882 a year, or £907 each month!

Are the dividends sustainable?

For this to work over a long period, a company needs to generate sufficient income to pay the dividends. In this context, Legal & General has always looked solid enough to me, and it still does.

On the risk side, its 3.8 debt-to-equity ratio is higher than the 2.5 or so considered healthy for investment firms. So I would like to see that trending lower over the next three years.

However, last year it made an operating profit of £1.67bn, against 2022’s £1.66bn.  It has also forecast cumulative Solvency II capital generation of £8bn-£9bn by the end of this year. Both of these are strong capital buffers for the future.

Overall, consensus analysts’ estimates are for its earnings to grow by 21.9% a year to the end of 2026.

Forecasts are also for total dividends of 21.4p in 2024, 22.7p in 2025, and 24.2p in 2026. On the current share price of £2.43, this would give annual dividend yields, respectively, of 8.8%, 9.3%, and 10%.

Some 35 years ago I was lucky enough to stumble into buying Legal & General and have benefitted ever since.

And 35 years later, having learned a lot as a former investment bank trader, I still see it as one of the best dividend shares around.

So, I will be adding to my holding once again very soon indeed.

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