Despite significant headwinds, Legal & General (LSE: LGEN) remains one of the most attractive passive income opportunities on the FTSE 100. At 8.2%, its yield is more than double that of the UK average and yet still looks well-covered and sustainable.
What’s more, it’s estimated to be trading at 57% below fair value using a discounted cash flow (DCF) model. So is it time for me to stock up on more of the shares? Before diving in, I decided to take a closer look at its full financial picture.
Solid results
Legal & General kicked off 2025 with a bang, delivering solid results for the 2024 fiscal year. Both core operating profit and earnings per share (EPS) rose 6% to £1.6m and 20.2p respectively.
The insurer has since continued generating substantial cash from operations, with Solvency II operational surplus generation of £1.75m. That makes it well-positioned to support its ambitious £5bn-£5.6bn capital return target over 2025 to 2027.
Critically, all three core divisions continue to do well, with Institutional Retirement profit up 7% and Retail annuities climbing 48% amid higher interest rates. Meanwhile, Asset Management revenue grew 4% despite 2% lower average AUM, reflecting a strategic shift toward higher-margin products.
The dividend outlook
For passive income investors like myself, the dividend situation is the core of any investment decision. As we already know, the yield is high and payouts are reportedly well-covered — but I had to check.
With the business generating over £1.75bn in annual capital, the board plans to return over £5bn via dividends and buybacks through 2027. Add to this future profit of around £14.8bn, largely backed by earnings from its annuity portfolio that will be released over decades. So even if core EPS growth disappoints, the capital generation machine remains strong. Furthermore, it’s adopted a capital-light strategy for its struggling UK pension risk transfer business, mitigating capital losses.
Going forward, the board has committed to growing dividends at a conservative 2% annually through 2027 – a notable slowdown from the historic 7% pace. Still, considering the yield is already generous, that’s understandable.
Still, interest rate cuts pose a risk. If they drop too sharply, it could hurt the company’s Solvency II position since its liabilities are backed by long-term gilts. Since it doesn’t publicly disclose its gilt holdings, its unclear how much of a risk this poses.
My verdict
Heading into 2026, rate cuts will continue to shape much of the investment outlook – and Legal & General is no exception. Despite this risk, I think L&G’s solid dividend track record and consistently good performance make it a stock worth considering – particularly for income investors.
Future payouts are supported by genuine capital generation, a large profit pipeline, and management commitment to shareholder returns. As a bonus, the undervaluation assessment provides the added potential of price appreciation for value investors.
I’ve been a dedicated L&G shareholder for several years, with the stock providing me with consistently lucrative returns. Heading into 2026, I plan to keep topping up my position as part of a diversified passive income portfolio.
