I would buy 4,186 shares in Legal & General to aim for £14,616 a year in income

Financial services and asset management firm Legal & General (LSE: LGEN) paid a dividend of 20.34 %.

This yields 9.5% at the current price of £2.15. By comparison, the average yield of FTSE 100 it is only 3.6% again FTSE 250 only 3.3%.

So, £9,000 (the amount I started investing with 30 years ago) would buy me 4,186 shares in Legal & General today. With a 9.5% yield, these will produce £855 in dividends in the first year. Over 10 years at equal yields these can rise to £8,550 and over 30 years to £25,650.

A better return than you can get from a UK savings account for sure. But more can be done by using a common investment technique called ‘dividend compounding’.

What is the point of compounding the dividend?

This method aims to produce higher returns over time than can be achieved otherwise. It is achieved by using dividends paid by the stock to buy more. And the results are amazing.

For example, the same £9,000 at the same 9.5% yield would make you £14,185 after 10 years, not £8,550. And over 30 years on the same basis, I would make £144,854 instead of £25,650.

Adding on the initial crop of £9,000 would give a total holding of £153,854. At the same rate of 9.5%, this would pay me £14,616 a year in income. This is money made with little effort, like dividends.

Are high yields sustainable?

Company shares and share prices are driven by earnings growth over time and may go up and down. Legal and General Risk is the resurgence of living expenses, which may cause customers to close accounts.

Another re-emergence of the type of markets seen in the small financial crisis in March/April 2023. This makes generating stable investment returns very difficult to achieve.

However, analysts predict that Legal & General’s revenue will grow by 28% each year until the end of 2026.

Given this, estimates are that it will at least be able to match its promised increase in dividend payments during that period.

Back in June, the company announced that it would increase its dividend this year by 5%. That would bring the total payout to 21.36p, representing 9.9% on the current share price.

For 2025 and 2026, it promised a rise of 2% a year, raising the respective dividends to 21.78p and 22.22p. At the current share price, these would produce yields of 10.1% and 10.3%.

Aren’t stocks also important?

As long as the shares maintain a high yield (which is not guaranteed) – apart from the share price – I will never sell them. However, if I have to for some reason I would prefer not to lose money on the price.

To reduce the chances of this happening, I buy stocks that look worthless to me. And Legal & General fits the bill here.

A discounted cash flow analysis using some analysts’ calculations and mine shows that the shares are currently 61% undervalued. So the fair value for them is £5.51, although they could go lower or lower due to the unpredictability of the market.

Given their strong earnings growth prospects, exceptional yield, and poor valuation, I would buy more Legal & General shares in the near future.