Buying 6,195 dirt cheap Legal & General shares would give me a £100 monthly income

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I’ve just invested £1k in Legal & General (LSE: LGEN) shares and the first thing I did was kick myself for not buying more. I plan to put that right though.

The obvious charm of buying Legal & General is its mighty dividend yield. The shares are forecast to deliver income of 8.8% over the next year, nicely covered 1.7 times by earnings. That’s one of the best yields on the FTSE 100.

It’s a top income stock

There’s a danger in going flat out for maximum income, as I’ve discovered. I bought Rio Tinto last autumn when it was yielding 11%, but soon after management slashed the dividend in half.

That’s hardly the end of the world. Its shares are still up since I bought them, and today’s yield is a handsome 7.75%.

Could L&G do the same? Personally, I think its dividend looks stronger, as the group posted a 12% increase in full-year 2022 operating profit to £2.52bn. Management felt able to increase its dividend by 5% to 19.37p per share and has ambitions to keep the cash flowing to shareholders reporting “strong dividend headroom”.

Cash generation of £5.1bn and capital generation of £4.9bn are expected to climb to between £8bn and £9bn by 2024. By then, today’s £3.3bn dividend total should range from £5.6bn to £5.9bn, with £700m net surplus generation on top. I like the sound of that.

Legal & General boasts a “strong and highly resilient” balance sheet, with a record solvency II coverage ratio of 236% (up from 187%). Dividends are never guaranteed, of course, and can be cut or abandoned at any time. Yet L&G kept the income flowing during the pandemic and is increasing payouts slowly but steadily.

It isn’t firing on all cylinders. Its investment arm, Legal & General Investment Management, was hit by recent stock market volatility, with assets under management falling £225bn last year. That hit percentage-based management charges, and profit fell from £422m to £340m. With luck, it should make good much of those losses when the stock market recovers.

Not much growth

L&G trades at just six times earning. That seems low but its shares have done poorly. They’re down 15.26% over five years and 8.64% over 12 months. The income is the selling point here.

So how many L&G shares do I need to generate my £100 monthly income target? Based on the 2022 dividend of 19.37p, I’d need 6,195 shares.

At today’s share price of 229.8p that would cost me £14,218. Clearly, my £1k stake leaves me well short of that. Even if the yield jumps to, say, 20p, I can only look forward to income of £87 a year from my 438 shares. That’s £7.25 a month. I said I didn’t buy enough of them!

I’m currently transferring an old company pension scheme into a self-invested personal pension (Sipp), and this should give me a lot more financial firepower.

My portfolio isn’t big enough to invest £14,000 into one stock, but I’d like to up my L&G stake to £5,000. That will give me income of £36.25 a month, which should rise over time if management hits its targets.

The post Buying 6,195 dirt cheap Legal & General shares would give me a £100 monthly income appeared first on The Motley Fool UK.

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Harvey Jones has positions in Legal & General Group Plc and Rio Tinto Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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