£5,000 of 9.2%-yielding Legal & General shares would make me £599 a month in passive income over time!

Legal & General (LSE: LGEN) shares are down 14% since the 31 January 12-month high of £2.58. With the stock price and yield moving in opposite directions, the shares now pay an annual dividend yield of 9.2%.

However, the financial services and asset management giant is committed to pushing these fees even higher in the coming years. It has promised a 5% increase this year from last year’s dividend of 20.34p. This would yield a 2024 payout per share of 21.36pa (giving a current yield of 9.7%).

It then committed to increasing this by 2% in 2025 (to 21.79p) and by a further 2% in 2026 (to 22.23p). These increases will produce yields of 9.9% and 10.1% respectively.

How much income can be made here?

Passive income is money made with little effort, such as dividends paid on stocks. I have focused on stocks that can increase this income stream since I turned 50 years ago. I intend to continue living on these benefits.

I am considering buying another £5,000 of Legal & General shares to add to my current holding. This will make a dividend of £460 this year at a yield of 9.2%.

Over 10 years on the same basis, this will rise to £4,600 and over 30 years to £13,800.

Turbocharging is compensating

These returns are not to be sniffed at, but a lot can be done using ‘dividend compounding’. This is a common investment practice where many stocks are bought for the dividends they pay.

Using this method at the same average yield, my £5,000 would make another £7,503 after 10 years, not £4,600. And after 30 years on the same basis, I would have made £73,172 in dividends, instead of £13,800.

At that time, the total value of my Legal & General shares (including the £5,000 initial investment) will be £78,172. With a 9.2% yield, I would be making an annual income of £7,192, or £599 each month!

What does the share price look like?

A company’s budget (and its share price) is driven by the growth of its earnings over time.

Legal & General risk is a reversal of the recent decline in UK inflation and interest rates. This may cause the cost of living to rise again and cause customers to close their investment with the company.

That said, consensus analysts forecast that the company’s earnings will grow by 28% annually through 2026. Incorporating this growth and other figures into a discounted cash flow analysis shows that shares are currently 59% undervalued.

Therefore, the fair value of Legal & General stock is £5.39, although it could be lower or higher, given the market’s uncertainty. However, it emphasizes to me how cheap the stock looks, in addition to being an income gem.

Will I buy more stock?

I have bought shares of Legal & General several times over the years so the company has strong growth prospects. Nothing has changed here, in my opinion.

Ultimately, I expect these to drive the share price higher, in addition to maintaining a very high dividend yield.

So, I will buy more shares soon.