Like many investors, I love a good dividend share.
But, of course, there is always a bit of ‘bird in the hand versus two in the bush’ when it comes to dividends.
They are never guaranteed to last (and share prices can move around). So I think focussing too much on a share’s current dividend yield can distract an investor from looking at what really matters. What really matters, in my view, is the company’s future commercial prospects and what they are likely to mean for its dividend and share price.
High-yield UK share
As an example of why that can be important, consider Legal & General (LSE: LGEN).
At first blush, its 9.1% dividend yield looks very exciting. Not only that, but the FTSE 100 financial services giant has grown its payout per share every year bar one since the 2008 financial crisis – and plans to keep doing so.
But while that juicy yield certainly looks attractive, how has the share price been doing?
Not brilliantly, all things considered.
Sure, over the past five years, it has moved up 20%. That sounds good, but is just a third of the 61% gain we have seen in the wider FTSE 100 index over that period.
A changing picture
While that long-term share price performance looks weak compared to the blue-chip index, past performance is not necessarily indicative of what to expect in future.
On top of that, the firm has announced plans to sell a large US business. That could help bolster its cash pile, funding dividend growth and share buybacks in the short term. But it will also leave a hole in revenues.
However, Legal & General’s business has been underwhelming in some ways over recent years. Last year, for example, net profit fell almost 60%, to £191m. That followed a fall of 42% the prior year, and 62% the year before that.
Compared to a 2021 net profit north of £2bn, last year’s figure looks woeful.
Could things get better from here?
Still, earnings are only one metric of a company’s performance. Financial services firms’ earnings can move around a lot due to things like asset valuations changing.
From a cash generation perspective (which I see as more important than reported earnings when it comes to funding the dividend), Legal & General is performing far more steadily than its profit and loss account may suggest.
In the first half of this year, for example, capital generation (reported using the Solvency II standard) edged up 3% year on year to £729m.
I see further long-term growth prospects thanks to Legal & General’s large customer base, deep financial sector expertise, and focus on retirement-linked products.
Is there a catch?
One reason the Legal & General share price has underperformed the FTSE 100 over five years may be its reduction from 5% to 2% targeted annual dividend per share growth.
There are risks – and choppy financial markets could heighten them, if policyholders start withdrawing funds more than usual.
As I said, no dividend is ever guaranteed.
But I see Legal & General as a well-run, proven business with strong cash generation potential. I therefore think of it as a dividend share investors should consider.
