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Any stock with a yield approaching double figures tends to set off alarm bells in my head. More often or not, it’s a pretty strong signal that the dividend’s at risk of being cut.
With this in mind, I’ve been thinking about whether a certain FTSE 100 stock is a nightmare-in-waiting for unwary buyers. Or is it, in fact, an unmissable opportunity?
Monster yield
The company in question is Legal & General (LSE: LGEN). And from the off, its income-generating credentials look top-notch. As I type, the shares have a forecast dividend yield of 9% for FY25, making it the biggest payer in the UK market’s top tier. For perspective, a fund tracking the index would bring in around 3.2%.
Legal & General stock looks cheap too, at least relative to the market as a whole. A price-to-earnings (P/E) ratio of 11 is below the average in the FTSE 100, albeit not a screaming bargain in among financial stocks.
Not fully covered
The trouble is that the current yield isn’t expected to be covered by earnings. This might explain why the £14bn-cap’s share price hasn’t exactly rocketed in 2025 so far. A gain of only 3% or so lags the index by some margin.
On it’s own, the lack of cover isn’t necessarily a deal breaker. Earnings in every company are cyclical to some extent and a few are occasionally required to dip into cash reserves to fund the full payment.
The most important question to ask is whether this looks like being an ongoing problem. If so, any large or unexpected dip in profit could force management to either maintain the total annual dividend or reach for the knife.
Well, here’s where things get a bit tricky.
Dark clouds gathering
It’s not controversial to say that the UK economy isn’t firing on all cylinders right now and many of us are continuing to feel the pinch due to higher prices. Ultimately, this could lead to reduced demand for the Legal & General’s products. More generally, the firm could see a reduction in fees if markets go through a rough patch.
Then there’s the small matter of the next month’s Budget too. Let’s just say that no one’s expecting much to sing about on 26 November.
On the other hand, the fact that this company has its fingers in so many financial pies, namely life insurance, pensions and asset management, could make it a safer bet. As a result, Legal & General’s shown itself adept at handling past economic crises and, despite needing to halve its final dividend back in 2008, has shown good form when it comes to raising payouts ever since.
An essential buy?
As a 40-something Fool, I’m still looking to grow my wealth over the next few decades. In other words, dividends are nice to receive (and reinvest) but they don’t run the show.
However, I can see why someone wanting to prioritise receiving cash from their investments may wish to consider buying Legal & General stock as part of a diversified portfolio. That incredible yield’s undeniably tempting, assuming it can be sustained.
But too good to ignore? That might be stretching things. There are a number other dividend stocks on the UK market that look just as tasty to me.
