Is the 8.8% Legal & General dividend yield a golden opportunity or a red flag?

I like the passive revenue prospects of a excessive dividend yield from a high quality firm. I regard FTSE 100 monetary providers Legal & General (LSE: LGEN) as a high quality firm. It has been round for hundreds of years, has a massive buyer base, and a confirmed enterprise mannequin. The Legal & General dividend can be one thing I like a lot. Its 8.8% yield places the firm amongst the most beneficiant of dividend payers in the blue-chip index.

Nevertheless, a excessive yield might be a red flag that the Metropolis expects a dividend reduce might occur in future and is pricing the share accordingly. The 8.8% Legal & General dividend yield is effectively over twice the index’s common, which at the moment stands at 3.5%.

Legal & General has grown its dividend yearly in recent times and plans to maintain doing so. But it surely has set out an expectation of decrease annual progress in the dividend per share (2% as a substitute of 5%) from this yr onwards. What does that imply for me as a shareholder?

I’m planning to carry

The reply might turn into: not a lot.

I plan to hold onto my Legal & General shares as I reckon the dividend yield stays extremely enticing. Whereas a slower progress charge shouldn’t be sensible information, the yield is already effectively above common and even low single-digit proportion progress in the dividend per share might make it extra enticing nonetheless.

The corporate feels flush sufficient with money to be shopping for again its personal shares on a common foundation. Certainly, this month the agency introduced plans to spend half a billion kilos shopping for again its personal shares.

Its core working revenue grew final yr. However the revenue earlier than tax utilizing IFRS accounting requirements was extra modest, at £542m versus £1.6bn for the core working revenue. Accounting in monetary providers might be devilishly sophisticated. That may make it arduous for traders to get a very clear image of how a firm is acting at a granular stage.

However, whereas earnings have fallen, Legal & General continues to be worthwhile and has a confirmed capability to generate massive sums of extra money. That issues as a result of it’s such free money flows that allow a firm to fund its dividends.

Retaining life like expectations

However whereas the juicy Legal & General dividend continues to draw me, I additionally have to preserve my enthusiasm grounded in actuality.

The share value has soared 51% in 5 years.

That sounds nice nevertheless it primarily displays a droop throughout the pandemic. Over the previous yr, the share has dropped 4%.

As the firm reduces in dimension resulting from asset gross sales, I believe its share value might wrestle to maneuver up a lot, although the plan to purchase again its personal shares might assist in that regard.

The decrease dividend progress charge, whereas nonetheless in constructive territory, may be a signal that the firm sees probably decrease future enterprise progress prospects than earlier than.

So, I’m enthusiastic about the dividend potential of my Legal & General shareholding, however am preserving my expectations modest in relation to share value efficiency.