Image source: Getty Images
Legal & General (LSE:LGEN) shares are the kind of thing your grandfather probably had years before online investing. The company feels like it’s been around since 1836 – which it has.
A dividend yield of 9% may attract the attention of retirees looking for additional income in the near future. But is it FTSE 100 is stalwart suitable for investors under 70?
Investing for the long term
There’s a good case for thinking the stock can work for long-term investors. If Legal & General holds its dividends, someone investing £10,000 today could earn £23,450 in 2050.
In addition, reinvesting dividends can result in even greater returns. Exactly how much depends on average yields over the next 25 years.
paid a dividend of 9.3 %. And reinvesting at that rate for twenty and a half years results in something generating £8,589 a year in income.
The biggest thing investors need to think about is the possibility of a dividend cut. And while the business may seem like a piece of cake, there’s a lot to consider.
Insurance
Legal & General insures people’s cars, homes, lives, and anything else they need coverage for. None of its business lines can be properly described as high-octane, but some are riskier than others.
With car insurance, the underwriter tries to determine the risk of someone being involved in an accident and needing to make a claim. And if they get it wrong, they can price the contract higher next year.
Life insurance is not. Underestimating the risk of someone becoming seriously ill can expose the insurer to ongoing liabilities without the possibility of raising premiums to cover this.
That – as I see it – is a big risk for the stock. Since insurance accounts for almost half of the company’s revenue, investors should be aware of the inherent risks involved.
Pensions
Pensions are another important part of what Legal & General does. Much of the company’s recent growth has come from its Pension Risk Transfer division. This does what it says – it takes on potential liabilities of other pension funds in exchange for cash. So investors should have an idea of what these risks are.
One risk is long life expectancy which results in people collecting payments for longer than expected. Another possibility is that lower interest rates cause the present value of future costs to rise.
Both of these are difficult to predict. So investors without an active crystal ball should be aware of the company’s exposure to long-term risks.
A stock to consider buying?
In the UK stock market, Legal & General stands out as a sensible adult in a room not full of reckless youngsters. But there is a lot of responsibility on its well-placed shoulders.
The big question is whether the dividend yield of just over 9% is enough to cover the long-term risk. But even investors who aren’t looking for a quick buck should consider that.
Source link
