Here’s how investors can consider trying to turn £11,000 of Legal & General shares into £13,998 a year in dividend income

Legal & General (LSE: LGEN)’s 8.9% return on shares is almost two and a half times the average FTSE 100 3.6% yield. And it’s approaching three times the FTSE 250’s 3.3% payout.

Therefore, investors who consider a sum of £11,000 (UK savings average) in the company can make £979 in dividends in the first year. If the yield equals 8.9% over 10 years, these payments can rise to £9,790, and over 30 years to £29,370.

The ‘miracle’ of dividend compounding

This income is much higher than what would be made in a typical UK savings account. But it can be even bigger by using the traditional ‘dividend compounding’ investment technique. This includes using dividends paid by the company to buy back more of its own shares.

Using this method would produce £15,699 in dividends after 10 years, not £9,790, provided the yield was 8.9%. And on the same basis, the dividend income after 30 years would be £146,282 rather than £29,370!

With the initial £11,000 added, the total value of the Legal & General Holding will be £157,282. This will pay an annual salary of £13,998 at the time, or £1,167 every month.

Is the stock undervalued?

No one wants dividend benefits to be reduced by a loss in share price in the event of a stock sale.

To reduce the chances of this happening, I sometimes buy stocks that don’t seem important to me. Conversely, of course, it also increases the likelihood that additional profit will be made from the profit in the share price.

In Law & General, a discounted cash flow analysis using some analysts’ calculations and mine shows that the stock is technically undervalued by 62%.

Therefore, the fair value of the shares – currently priced at £2.29 – is £6.03. This does not guarantee that they will reach that level, given the state of the market. But it strongly indicates to me that they look very cheap at their current price.

The risk here is any new financial crisis that could cause customers to cancel their policies. However, consensus analysts forecast that Legal & General’s earnings will grow by 24.14% annually through the end of 2026.

And it is earnings growth where the power increases in the company’s income and the value of its shares over time.

Will I buy more shares?

I have added to my holdings of Legal & General stocks several times over the years based on three factors.

The first reason – and the main reason – is its exceptional growth potential. This remains the case in my opinion.

The second is its very high yield and hopes that this will be sustained. Again, this still holds up well, in my opinion. Analyst estimates are that the stock’s yield will rise to 9.5% in 2025 and reach 9.8% in 2026.

And the third is its incommensurability. This looks like there is, so all three important reasons to buy it are still in play.

As a result, I will be buying more shares of Legal & General soon.