Stock market

I will buy 11,220 legal and ordinary shares for £200 a month in passive income

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I am making my position. Legal and General (LSE: LGEN) shares for a few years now. But with the forward dividend yield currently at a juicy 8.46%, I’d like to load up more for my ISA.

It would be good to reach a position where FTSE 100 The stock is paying me the equivalent of £200 a month in passive income. What will it take to get here?

Great all-round value

First, let me explain why I like these particular shares. There are number of reasons for this.

As mentioned, the dividend yield is 8%+, higher than anything you can get from a FTSE 100 tracker fund or savings account. The firm has an excellent track record of increasing its payout.

While there’s no guarantee this run will continue, I’d still like to see a history of rising profits.

Second, shares are trading at a forward price-to-earnings (P/E) ratio of around 10 and a price-to-sales (P/S) ratio of 0.83. It is cheaper than its peers in the sector.

Also, Legal & General has a strong balance sheet. At the end of 2023, its Solvency II ratio was 224%. This is well above the 100% regulatory requirement and indicates financial strength.

Passive income

For 2024, the insurer is expected to pay a dividend of 21.4p per share. So I would need to buy around 11,220 shares to target £200 a month in passive income.

Right now, they will cost around £28,350. This tells me that I will save more cash to reach my goal!

For someone starting from scratch, they can achieve this in just four years by investing £550 a month in shares.

Of course, this assumes a stable share price, which is unlikely. In fact, it will fluctuate over this period. And I’d also like a diversified basket of stocks to offset the risk of a dividend cut on just one.

Finally, just to clarify, the firm pays twice a year, usually in June and September. So, £200 per month would be just an equivalent amount.

Low value

Naturally, there are risks. The company has exposure to the UK economy and property market. Any significant economic downturn could adversely affect the value of its investments.

Also, a breakdown in some part of the global financial system can cause share prices to fluctuate.

Despite these risks, I think the shares are undervalued. The firm’s pension risk transfer business is enjoying record growth as more pension funds offload liabilities.

In 2023, an estimated £50bn of UK pension liabilities were secured with various insurers. In the US, where it has a growing presence, the figure was $45bn.

But the company says that around “£1.4trn and over $3trn of related DB [defined benefit] Pension Scheme Assets [are] Still sitting on the company balance sheet. This suggests a multi-decade run and the potential for healthy markets for many years to come.

Meanwhile, the UK’s over-65 population is growing rapidly, so naturally retirement income products should be in high demand.

Legal & General’s reputation as one of the UK’s top pension brands positions it well to capitalize on this aging population trend.

No one can predict the future with certainty, but I think the stock will pay dividends for many years to come.

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