I’d buy 6,477 shares of this stock for £100 in monthly passive income

If I want a small but steady passive income, a good place to start would be stocks that offer dividend payments. And here in the UK, I have plenty of income stocks to choose from. For example, I want to earn £100 a month. This is a stock that you can use to try and get it.

£100 per month

a UK insurance and pensions provider Legal & General (LSE: LGEN) is one of those income stocks that offers a ‘pound in the pocket’ return rather than the uncertainty of the ups and downs of the stock market. The company currently returns 7.3% to shareholders in annual results.

If I bought 6,477 shares of Legal & General then the 7.3% yield would generate £1,200 a year. That gives me around £100 a month. As with most stocks, dividends are usually paid twice a year rather than monthly and actual returns vary and are not guaranteed.

How much is the stock worth? Well, I now have to spend a total of £16,438. I don’t have that kind of money, but I can try.

If I can save £400 a month, I will make that amount in about 41 months. But I was able to speed up the process by reinvesting the dividends, meaning I could make that amount in just 37 months. So it takes about three years of savings to create an annual income of £1,200. A neat return, when you put it that way.

But it’s important to look at the risks as well. And the obvious risk is dividend payments. Just how likely is it to continue in the future?

Dividends are risky?

The first step you can take to see if a dividend can maintain its value is to look at past performance. These are the annual results for Legal & General over the past five years.

I can see that the yield is a touch lower than the current 7.3% dividend, which indicates that it may decrease in the future. However, strong payouts during the 2020 Covid crisis show Legal & General’s commitment to paying dividends to shareholders, as many other companies have reduced or canceled dividends for the year. But the results just don’t tell the whole story.

Another useful piece of information is the percentage of earnings used for dividend payments. A rule of thumb is that less than 60% means the company is not spending too much on dividends.

So here’s more good news. The company rarely spends more than 60% of its earnings on dividends to shareholders, which means that the payout can be sustained without much impact on the company. 79% in 2020 as a result of Covid, which should be one.

Of course, this still does not guarantee the future when unforeseen events may affect the payment of dividends. In 2008 and 2009, for example, the company cut its dividend significantly. And I have to consider the potential losses through the share price. Overall though, I like the stock for its passive income potential and will be looking to open a position soon.