The Income Investor: Legal & General shares vs cash

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The war in Iran has prompted a spike in oil and gas prices that could ultimately lead to higher-than-expected inflation. In turn, this may prompt the Bank of England to adopt a less accommodative monetary policy than planned, which could mean that interest rates end up being higher for longer.

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Income investors may therefore wonder whether they should change their strategy, in terms of now favouring cash over dividend stocks. After all, higher interest rates could mean that cash continues to offer a more attractive yield than the FTSE 100, with easy-access savings accounts already having income returns above 4% versus a 3% yield for the UK’s large-cap index.

Furthermore, higher-for-longer interest rates could act as a drag on the economy’s growth rate. This may lead to slower-than-expected dividend growth for a wide range of firms, as well as the potential for reduced dividends among companies that are highly dependent on levels of economic activity. And with the stock market exhibiting extreme volatility of late, some income seekers may feel that “cash is king” at present.

Dividend appeal

However, there are no guarantees that recent energy price rises will be sustained and that inflation will materially increase from its current level. Indeed, the situation in the Middle East is highly fluid and the duration of the war in Iran, as well as its impact on the world economy, are known unknowns. Income investors who sell stocks to instead hold cash may not necessarily benefit in the long run if inflation and interest rates ultimately resume their recent decline.

Cash also has a rather disappointing track record in terms of providing a sustainable income over the long run. Although its income return is relatively appealing today, the return on cash is extremely unlikely to grow in perpetuity. After all, interest rates will almost certainly fail to consistently rise over the long run.

This means that the level of income received from cash savings is almost certain to ultimately fail to keep up with inflation, leading to an eventual reduction in spending power. Contrast this with dividend stocks, which can realistically deliver consistent growth in shareholder payouts in perpetuity, and income seekers with an extended time frame may be better off sticking with equities rather than pivoting to cash.

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Furthermore, the economy and the stock market are both cyclical. Even if they experience a challenging period over the short run because of the war in Iran or any other difficulties, history suggests they are extremely likely to return to their long-term average growth rates over the coming years. As a result, any slowdown in dividend growth and paper losses caused by a falling stock market are likely to be only temporary in nature.

Investment potential

Indeed, the stock market’s ongoing bout of volatility means that several of its members now trade on more attractive valuations. The FTSE 100, for example, has fallen more than 4% since the war in Iran started at the end of February, with many large-cap stocks now offering a wide margin of safety and scope for long-term capital growth, as well as more favourable dividend yields.

Certainly, their share prices could remain highly volatile in the short run. However, for many income investors, FTSE 100 dividend shares have the financial means and competitive position to overcome what is undoubtedly a highly challenging period. Moreover, many FTSE 100 firms can amply afford their dividend payments, which indicates that shareholder payouts are likely to at least be maintained in the short run and, potentially, grow as the economic outlook improves.

This suggests that long-term income seekers may wish to stick with their strategy of relying on dividend stocks rather than cash. Building a diverse portfolio of high-quality firms that trade at fair market valuations, even amid heightened geopolitical risks, may put them in the best position to enjoy improved spending power over the coming years.

Source: Refinitiv as at 17 March 2026. Bond yields are distribution yields of selected Royal London active bond funds (as at 16/17 March), except the global infrastructure bond which is 12-month trailing yield for iShares Global Infras ETF USD Dist as at 16 March. SONIA reflects the average of interest rates that banks pay to borrow sterling overnight from each other (13 March). Best accounts by moneyfactscompare.co.uk refer to Annual Equivalent Rate (AER) as at 17 March and which exclude bonuses.

Sound fundamentals

Diversified financial services company Legal & General Group (LSE:LGEN) appears to offer an upbeat long-term income investing outlook. The FTSE 100 member’s dividend yield of 8.7% is 570 basis points higher than the FTSE 100’s dividend yield, making it the index’s highest-yielding share. Its yield is also approximately double the income return presently available from an easy-access savings account.

Alongside a relatively high yield, the company’s shares trade on a modest valuation. For example, they have a forward price/earnings (PE) ratio of 10.6. This is 30% lower than the FTSE 100’s earnings multiple of 16.9 and suggests there is scope for an upward rerating.

Growth opportunities

Of course, the company’s yield and earnings multiple have been flattered by a share price fall following the release of its annual results in the first half of March. Its shares are down around 4% since then, with results showing profits missed expectations despite it recording a 9% rise in core earnings per share (EPS).

Despite this, Legal & General stated that it is making good progress towards its 2028 business targets. Indeed, it is expected to deliver EPS growth of 15% in the current year and 11% next year.

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The company’s EPS growth rate is set to be supported by a £1.2 billion share buyback programme that was launched shortly after the release of full-year results, as well as continued growth opportunities in its pension risk transfer business. This is where the company provides an insurance policy to defined benefit pension schemes that guarantees retirement benefits will be paid. And while the company’s asset management segment may be negatively affected by an uncertain economic period that prompts asset price falls, a shift towards higher-margin products and cost reductions could help to offset this.

Risk/reward ratio

Of course, Legal & General’s dividend growth rate in its latest financial year was behind inflation. Its shareholder payouts rose by 2%, versus an annual price rise of 3.4%, which means its shareholders experienced a reduction in their spending power. Furthermore, the company’s EPS did not cover dividends per share in the 2025 financial year, with it having a payout ratio of 104%. Over the long run, a figure more than 100% would ultimately prove to be unsustainable.

However, EPS growth is likely to be substantially ahead of dividend per share growth in the next two financial years, given that Legal & General is forecast to raise shareholder payouts by 2% per year. This should reduce its payout ratio to a sustainable level. And with an exceptionally high yield, there appears to be a wide margin of safety to factor in potentially modest rises in dividends due to events in the Middle East.

On a long-term view, the company’s low valuation, attractive yield and profit growth potential indicate that it offers income investing appeal. Although short-term share price volatility and falling asset prices are key risks, the stock appears to have a favourable risk/reward ratio.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.