Since I turned 50 a while ago, I FTSE High dividend stocks because I want to increase my passive income and further reduce the burden of my work.
Passive income is money that you can earn with minimal daily effort, giving you more time to do other things.
One of the first stocks I bought (about 35 years ago) was Legal & General (LSE: LGEN). I had no idea what passive income was at the time, but I liked the idea of dividends being deposited into my bank account.
I still believe that. FTSE 100 Asset management companies are rated as one of the best companies for generating high passive income.
How much can you make?
It is currently paying dividends, giving me a return of 8.4% on my investment, meaning if I started investing again now with perhaps £11,000 (the average UK savings amount), I would have an extra £924 this year.
If you withdraw this dividend every year, as you did when you were younger, after 10 years you will have a profit of £9,240. This is assuming that the 8.4% yield stays the same over the period. The yield will fluctuate with share price and dividend fluctuations.
What I (thankfully) discovered was how much more profitable I could make by reinvesting my dividends in stocks. This is known as “dividend compounding” and it works the same way interest on a bank account works.
Using dividend compounding, after 10 years that would be £25,406 at an average yield of 8.4%. This would give you a passive income of £2,040 per year, or £170 per month.
Do this for 30 years and you’ll have £135,520, which works out to £10,882 a year, or £907 a month.
Is the dividend sustainable?
For this to work over the long term, a company needs to generate enough earnings to pay the dividend, and in this respect Legal & General has always looked solid enough to me, and still does.
On the risk side, the debt-to-equity ratio of 3.8 is higher than the 2.5 or so considered healthy for investment companies, so we expect this ratio to decline over the next three years.
However, operating profits last year were £1.67 billion, below the £1.66 billion expected in 2022. It also forecasts cumulative Solvency II capital generation of £8 billion to £9 billion by the end of this year, both of which provide strong capital buffers for the future.
Overall, analysts’ consensus estimates call for the company’s revenue to grow 21.9% annually through the end of 2026.
Total dividends are forecast to be 21.4p in 2024, 22.7p in 2025 and 24.2p in 2026. At the current share price of £2.43, these represent annual dividend yields of 8.8%, 9.3% and 10%, respectively.
Nearly 35 years ago, I was fortunate enough to serendipitously acquire Legal & General, and I have benefited from it ever since.
And 35 years later, and having learned a lot as a former investment banking trader, I still consider this stock to be one of the best dividend stocks out there.
So I’m really going to be increasing my holdings again very soon.
This article Could investing £11,000 in FTSE Dividend Superstars really make you this much passive income? first appeared on The Motley Fool UK.
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Simon Watkins holds shares in Legal & General Group Plc. The Motley Fool UK has no position in any of the stocks mentioned in this article. Views expressed on companies mentioned in this article are those of the author and may differ from official recommendations we make in subscription services such as Share Advisor, Hidden Winners or Pro. At The Motley Fool we believe considering diverse insights makes us better investors.
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