Legal & General shares yield 9% but trade at a 10-year low! Are they a deadly value trap?

Legal & General (LSE: LGEN) shares have been sitting in my Self-Invested Personal Pension (SIPP) for a couple of years now, and I can’t complain about the income.

Between April and August 2023, I invested £4,000 in the FTSE 100 insurer and asset manager. It’s a modest holding but it’s generating a lovely stream of dividends. In June and September last year, I pocketed £265 and £115 respectively. I reinvested both, along with a £100 payout from September 2023. So that’s £480 in total.

Today, I hold 1,980 shares. Of these, I bought 1,779 directly and picked up another 201 through reinvested income. Over the years, that second number should overtake the first.

Legal & General’s next dividend lands on 5 June. At 15.36p per share, that’ll give me £304. At today’s share price of 240p, I’ll pick up another 126 shares.

In total, my £4,000 stake’s now worth just over £4,750, a tidy 18.75% gain. Most of that comes from dividends, not share price growth. The stock’s flat over the last year and trades lower than it did a decade ago.

Income on tap

I’m sticking with my shares and hoping for the best. But I’m also worried that I’ve been lured into a value trap. Legal & General’s 2024 results were well received at first. They included a 6% rise in both core operating profit and earnings per share. The board also announced a £500m share buyback and plans to return more than £5bn to shareholders over the next three years

New business volumes look strong too. Its Institutional Retirement arm wrote £10.7bn of new deals, including record volumes in the US and Canada. Markets also welcomed the tie-up with Japanese mutual life insurer Meiji Yasuda.

Despite all the positives, Legal & General’s share price remains stuck. Tariff volatility and constant market noise aren’t helping, and there’s another issue. When a company pays a 9% yield, the price drops sharply on ex-dividend day. That means the stock must climb back up to stand still. It’s a bit like running on the spot.

The Legal & General share price is flat over one year although, to be fair, it’s up 21% over five years, with all dividends on top. It’s not exactly shooting the lights out though.

Growth on hold

The average analyst forecast suggests a one-year share price target of 267.3p. That’s an 11.5% gain from today. Combined with that 9% yield, it implies a 20% total return. Forecasts can’t be relied upon, especially in current conditions, but that’s still a promising outlook.

Of the 15 analysts covering the stock, nine call it a Strong Buy, one says Buy, five say Hold and just one suggests a Sell. They seem content. It’s also true that drop in interest rates could also boost demand for high-yield dividend stocks like this one.

Personally, while I think Legal & General shares are worth considering, because that truly is a brilliant rate of income, it may look better still when interest rates fall, and takes down yields on cash and bonds.

But investors should consider pairing this ultra-high income stock with a spread of growth picks as well, for balance.

The post Legal & General shares yield 9% but trade at a 10-year low! Are they a deadly value trap? appeared first on The Motley Fool UK.

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Harvey Jones has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.