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Legal & General (LSE:LGEN) shares are the kind of thing my grandfather might have owned in an age before online investing. The company feels like it has been around since 1836 – which it has.
A 9% dividend yield might well catch the eye of retirees looking for extra income in the near future. But is the FTSE 100 stalwart suitable for investors under the age of 70?
Long-term investing
There’s a decent case for thinking the stock could work for long-term investors. If Legal & General maintains its dividend, someone who invests £10,000 today could get back £23,450 by 2050.
Furthermore, reinvesting the dividends along the way could result in even bigger returns. Exactly how much depends on the average yield over the next 25 years.
Right now, the dividend yield’s 9.3%. And reinvesting at that rate for two and a half decades results in something generating £8,589 a year in passive income.
The big thing investors need to think about is the likelihood of the dividend getting cut. And while the business might look about as volatile as a loaf of bread, there’s quite a lot to consider.
Insurance
Legal & General insures people’s cars, homes, lives, and probably anything else they want covered. None of its business lines could fairly be described as high-octane, but some are riskier than others.
With car insurance, an underwriter tries to work out the risk of someone being involved in an accident and needing to make a claim. And if they make a mistake, they can price the contract higher next year.
Life insurance isn’t like this. Underestimating the risk of someone getting critically ill can expose an insurer to ongoing liabilities without the chance to increase premiums to offset this.
That – as I see it – is the biggest risk with the stock. With insurance accounting for around half of the company’s revenues, investors should be aware of the inherent dangers involved.
Pensions
Pensions are another significant part of what Legal & General does. A lot of the company’s recent growth has come from its Pensions Risk Transfer division. This pretty much does what it says – it takes on the potential liabilities of other pension funds in exchange for a fee. So investors should have an idea about what these risks are.
One risk is longer life expectancy resulting in people collecting payments for longer than anticipated. Another’s the possibility of lower interest rates causing the present value of future costs to rise.
Both of these are difficult to predict. So investors who don’t have a working crystal ball should be wary of how much exposure the firm has to risks that can play out over a long time.
A stock to consider buying?
In the UK stock market, Legal & General stands out as the sensible adult in a room not exactly full of reckless teenagers. But there’s a lot of responsibility on its well-established shoulders.
The big question is whether a dividend yield of just over 9%’s enough to make up for the long-term risks. But even investors who aren’t looking for instant income should give it some thought.
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