Annuity rates hit a record for the decade – is now a good time to buy an annuity?
Annuity rates have increased 10% since May 2024, part of an upward trend, while sales of the pension product are also soaring. Should you buy an annuity?

By Ruth Emery

Annuity rates have surged above 7.7%, the highest point of the decade. The figures, for May 2025, mark a 10% increase on a year ago, in an ongoing upward trend of annuity rates.

This marks a significant recovery from July 2020 when rates were just 4.71%, reflecting a 64% increase since then.

An annuity is an insurance product that delivers a guaranteed income for life in exchange for a pension pot.
A healthy 65-year old with a £100,000 pension pot could now expect to receive approximately £7,720 a year, according to the data from Standard Life’s annuity tracker.

The tool said a healthy 65-year-old man who bought an annuity in May 2025 at a rate of 7.72% could expect a total lifetime income of £155,180. For a woman of the same age, the expected income was £172,940.

Meanwhile, a healthy 70-year-old who bought an annuity in June 2025, could expect a rate of 8.54%. For a man, this would provide a total lifetime income of £136,680 while a woman could expect to receive £153,770.

Pete Cowell, head of annuities at Standard Life, said the surge in annuity rates offers retirees “one of the strongest opportunities yet for securing a guaranteed income in retirement”. He added: “This uplift has been driven by higher long-term interest rates.

“While the recent upward trend has been steady, it feels unlikely annuity rates will fall back to historic lows. Interest in annuities is likely to remain strong, particularly given the anticipated changes to inheritance tax in 2027, which may prompt more people to consider annuities as part of their retirement planning.”

Annuity rates are closely linked to government bond (gilt) yields, which surged to their highest level since 2008 in January. At the end of June 2025, yields on ten-year gilts are currently around 4.4%, a bit lower than where they were throughout January on either side of the gilt yield crisis that sent yields to record highs.

Annuity rates are closely linked to government bond (gilt) yields, which surged to their highest level since 2008 in January.

Gilt yields are affected by interest rates; the rise in interest rates over the past few years has been good news for annuity incomes. Hargreaves Lansdown notes that the rate for a 65-year-old with a £100,000 pension hit £7,586 after the mini-Budget in 2022.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says it’s a “reversal of fortune for a market that many thought had been all but killed off by a combination of rock-bottom interest rates and the Freedom and Choice reforms” in 2015, when then chancellor George Osborne said retirees didn’t need to buy an annuity anymore.

She adds: “Rising interest rates have seen incomes climb in recent years and people’s interest has risen along with them. The Association of British Insurers (ABI) recently hailed 2024 as a bumper year for annuities with sales of £7 billion. It’s a momentum that will continue into 2025 as people mull the best option for securing a guaranteed income in retirement.”

Indeed, annuity sales jumped 24% last year, and hit a 10-year high, according to the ABI. The most common age to purchase an annuity continued to be aged 65, making up 20% of all sales.

Six providers offer annuities to new customers, and last year 69% of annuity buyers switched – taking an annuity from a different provider to the one they held their pension savings with – compared to 64% in 2023.

Shopping around for an annuity can get you a better deal compared to staying with your current pension provider.

Pete Cowell, head of annuities at Standard Life, comments: “Annuity rates have continued to improve, offering retirees even stronger total incomes.

“Looking ahead, we expect annuity rates, as well as the demand for these types of products, to remain strong, especially with pensions being brought into scope for inheritance tax from 2027. Wealthier savers may be encouraged to access more of their pensions, with annuities becoming an increasingly attractive way of doing so.”

However, it’s possible that annuity rates might fall this year, especially if interest rates are cut again. Annuity rates drifted downwards last year following two interest rate reductions, but then soared during the gilt turmoil in January.

The Bank of England voted to cut the base rate from 5.25% to 5% last August, its first cut in more than four years. In November, rates were trimmed again to 4.75%. In February, the Bank reduced the base rate to 4.5%.

The Bank of England last cut its base rate in May, reducing it from 4.5% to 4.25%. This was the fourth time the base rate was reduced since August 2024.

But, even if annuity rates do fall, sales could get a further boost due to last year’s Autumn Budget announcement that pension pots will be liable for inheritance tax from April 2027.

“This will remove many people’s rationale for using income drawdown as they used it to pass the pension down generations tax-efficiently rather than draw an income from it. As they revisit their retirement income plans, many may opt to secure a guaranteed income through an annuity instead,” comments Morrissey.

If you’re thinking of buying an annuity, we look at the outlook for annuity rates, and what you can do to ensure you get the best deal.

Will annuity rates fall?
The outlook for annuity rates this year depends on what happens to gilt yields. If yields stay high, or soar further, we could see an increase to annuity rates.

But, if interest rates fall, gilt yields may follow suit, which will negatively impact annuity rates.

Holly Tomlinson, financial planner at the wealth manager Quilter, comments: “Annuity rates are closely tied to government bond yields, which can be influenced by changes in interest rates. A reduction in the base rate may lead to lower bond yields, potentially resulting in less favourable annuity rates for retirees.”

However, Morrissey points out that “we aren’t expecting the Bank of England to cut interest rates anywhere near as quickly as they raised them”.

According to Lily Megson, policy director at the financial adviser My Pension Expert, the base rate is expected to continue to fall this year, “meaning that some pension planners consider now to be the best time to lock in an annuity product”.

Is an annuity right for me?
Just because rates are high at the moment and represent good value, that doesn’t necessarily mean an annuity is the right retirement strategy for you.

Using your pension pot to buy an annuity is an irreversible decision, so you need to think carefully before making your mind up and should seek financial advice if you are unsure. You can find an independent adviser at Unbiased or VouchedFor.

According to the ABI, more annuity purchases occurred after taking financial advice in 2024, with 36% of buyers taking advice beforehand compared to 29% in 2023.

Some people may prefer to keep their pension pot in drawdown. This is when you keep part of your pot invested (where it will hopefully continue to grow), while withdrawing cash flexibly as and when you need it.

FCA data shows that pensions drawdown is the most popular option among retirees. Almost 280,000 people opted for drawdown in 2023/24, versus about 82,000 annuity purchases.

However, as previously mentioned, this could change as pension pots become liable for inheritance tax. Experts predict that savers may stop preserving their pensions to pass on to beneficiaries tax-free, and instead look at buying a guaranteed income with their pension.

Swapping a pension for an annuity means you get rid of your pension, reducing the size of your estate and any potential inheritance tax bill.

Another benefit of buying an annuity is the peace of mind it gives you. An annuity will pay out an income until you die, so there is no worry that you could run out of money during retirement.

Stephen Lowe, group communications director at the retirement firm Just Group, notes: “I think in today’s environment many people are seeing current annuity rates as sufficient to meet their retirement objectives and a good time to lock in. Along with other sources of guaranteed income such as the state pension, it provides peace of mind that there will always be an ongoing income to cover day-to-day bills.”

A potential downside with annuities is that, unless you choose a joint-life annuity, when you die, the income dies with you. So, if you only live a few years after you purchase the product, you won’t have received much money from your pension.

Some people may prefer to do a combination of the two approaches. You could use part of your pot to buy a guaranteed income, while leaving the rest invested so that you can draw on it as and when you need.

It’s also worth mentioning that there are different types of annuities on the market. Some are linked to inflation, while others pay a fixed amount each year.

Joint-life annuities continue to pay an income to a beneficiary (such as a spouse or civil partner) after you die, while others do not.

You can buy an annuity at any time in retirement, so you could leave it until you are older – especially as the older you are, the higher the annual income.

Purchasing an annuity earlier in retirement typically results in higher overall income. However, annuity rates tend to increase with age, meaning those who choose to buy an annuity later in retirement are likely to benefit from better rates.

As of May 2025, rates for a healthy 60-year-old were 7.01% compared to 8.54% for a healthy 70-year-old. This results in an annual income of £7,010 for a 60-year-old versus the £8,540 a healthy 70-year-old may expect to receive on a £100,000 pension pot – a difference of £1,530, according to Standard Life.

Clare Moffat, pensions expert at Royal London, comments: “The most suitable option will depend on an individual’s needs and while annuities aren’t for everyone, there are scenarios where they could be beneficial, so they should be considered as part of the retirement planning process.

“Many want complete flexibility with their retirement income, which explains the popularity of drawdown, while for others, buying an annuity offers them the comfort of a guaranteed income. For those people initially opting for income drawdown, that may not be the final decision. As people get older, some are keen to introduce a form of guarantee, so a happy medium for many is an annuity to cover basic living costs, providing comfort and reassurance, while leaving the rest invested for extra flexibility.”

Shopping around for an annuity
As well as considering what type of annuity is right for you (if any), you should do your homework to ensure you get the best rate.

“Different providers offer different rates and not searching the market can leave you thousands of pounds worse off over the course of your retirement,” Morrissey says.

Almost a third of retirees fail to shop around for the best annuity deal, instead sticking with their pension provider, according to the ABI figures.

Using a comparison site is a good starting point, Morrissey adds, but reminds retirees that there’s more to consider than the annual income alone.

“Single-life annuities offer higher incomes than joint-life ones but the joint-life one will offer an income to your spouse should you die first,” she points out.

Similarly, an inflation-linked annuity will generally offer a lower starting income than a level annuity, but if you live long enough (and inflation is high), you might end up getting more from the inflation-linked product.

Finally, Morrissey recommends giving all of your health details – including whether you smoke or drink – as this information feeds into the insurer’s calculations and can result in you getting an enhanced annuity, which pays a higher rate of income.

This marks a significant recovery from July 2020 when rates were just 4.71%, reflecting a 64% increase since then.

Do you really want to gamble with your future ?

TR over 1 year 25%, as the price rises the yield falls.

Yields 7.2%, so still a hold for the portfolio, maybe with a floor of 6% where reluctantly it might be sold.

Top Dividend Stocks to Maximize Your Retirement Income

Zacks Equity Research

Wed, June 25

Strange but true: seniors fear death less than running out of money in retirement.

And unfortunately, even retirees who have built a nest egg have good reason to be concerned – with the traditional approaches to retirement planning, income may no longer cover expenses. That means retirees are dipping into principal to make ends meet, setting up a race against time between dwindling investment balances and longer lifespans.

Retirement investing approaches of the past don’t work today.

In the past, investors going into retirement could invest in bonds and count on attractive yields to produce steady, reliable income streams to fund a predictable retirement. 10-year Treasury bond rates in the late 1990s hovered around 6.50%, whereas the current rate is much lower.

While this yield reduction may not seem drastic, it adds up: for a $1 million investment in 10-year Treasuries, the rate drop means a difference in yield of more than $1 million.

And lower bond yields aren’t the only potential problem seniors are facing. Today’s retirees aren’t feeling as secure as they once did about Social Security, either. Benefit checks will still be coming for the foreseeable future, but based on current estimates, Social Security funds will run out of money in 2035.

So what’s a retiree to do? You could cut your expenses to the bone, and take the risk that your Social Security checks don’t shrink. Or you could find an alternative investment that provides a steady, higher-rate income stream to replace dwindling bond yields.

Invest in Dividend Stocks

As we see it, dividend-paying stocks from generally low-risk, top notch companies are a brilliant way to create steady and solid income streams to supplant low risk, low yielding Treasury and fixed-income alternatives.

Look for stocks that have paid steady, increasing dividends for years (or decades), and have not cut their dividends even during recessions.

Considering FGEN’s FY25 results

The Oak Bloke Jun 26

Dear reader,

I looked at FGEN last November and a few readers asked me to look again given its annual results release for the year to 31/3/25.

FGEN’s portfolio now comprises 40 assets across the UK and Europe, diversified across renewable energy generation (73% by value), sustainable resource management (17%), and other energy infrastructure (10%). Key holdings include the Cramlington biomass plant, the Rjukan aquaculture facility in Norway, and wind, solar, and anaerobic digestion projects in the UK.

FGEN’s net asset value (NAV) per share declined by 6.3% over the reporting period, from 113.6p to 106.5p. This was partly the write off off its investment in hydrogen platform HH2E – and otherwise good old discount rates.

I wrote yesterday about how fellow IT SEIT is at a 9.6% discount rate. FGEN is at a slightly higher 9.7% rate. The rate appears very high even for comparable assets (e.g. Gore Street BESS are 7%-9% vs 10.3% here.

The discount rate is made up of the following rates:

An increase in the discount rate of 0.5% would result in a downward movement in the portfolio valuation of £17.2 million (2.7 pence per share) compared to an uplift in value of £18.0 million (2.8 pence per share) if discount rates were reduced by the same amount.

So compared to NESF’s 8% rate FGEN would gain £61.2m to be at 8% too.

Energy Generated:

1.27 TWh is 50% more than NESF but still sits below SEIT.

Power curves once again are, based on the forecasts of 3 experts due to be dropping away in the years ahead even though the 2024 power curve forecast for 2025 was well below the current 2025 rate (incorrect by about £15/MWh). If these experts can’t even forecast 1 year ahead accurately how much credence should you give to 5 years or 10 years?

Of course the power curve also bears little resemblance to the energy prices FGEN quote in their investment manager’s report:

EBITDA of £131.6m?

Now this is interesting since an FY25 EBITDA of £131.6m for FGEN compares very favourably to a SEIT’s EBITDA of just £86m. Favourably to the £678.7m NAV closing value.

So how are cash distributions so different to EBITDA? £90.4m of what might be approximated to be free cash flow (and is much lower than SEIT’s) nets to £66.9m as what appears to be a better proxy to the “real” returns for FGEN.

It mirrors the £63.4m of interest and dividends that FGEN earned as below.

I suspect the answer to this riddle is the EBITDA was £131.6m and FGEN own half those portfolio companies. It’s pretty frustrating to not just be given facts in a consistent manner.

Of course the statutory result was a loss due to a £57.4m fair value loss. We are told this is due to a power price forecast contraction and future cash flows. Well you know what I think of that.

Judging by the 92% operational and 8% in construction there isn’t much still to complete, but a review of the actual assets under construction reveals a vast array of big ticket items (e.g. a 0.75GW interconnector). Again a riddle, but the answer must be FGEN is taking a minority ownership. Perhaps even just 2%-5%.

Dividends and Capital

Of course a 2.1% dividend increase for FY26 to 7.96p per share and covered 1.32x by operating cashflow. FGEN has delivered consistent annual dividend growth over numerous years.

On top of dividends there were also NAV-accretive share buybacks and a £1.3m gain from asset disposals. The NAV total return was +0.6%. During the year, the company completed £88.6m of asset disposals (equivalent to approximately 10% of its portfolio), all at or above carrying value. The proceeds were used to repay floating rate debt and fund a £30m share buyback programme, of which £24.3m had been deployed by the end of March. Gearing was reduced to 28.7% from 31.2%, maintaining FGEN’s position among the least leveraged funds in the sector.

The Future

FGEN’s strategic review concluded a refocused strategy centred on proactive asset management and disciplined capital allocation would best serve shareholders. Quelle surprise.

FGEN say they will prioritise new investments in core environmental infrastructure sectors – including renewables, energy storage, and sustainable resource management – that offer long-term, stable, inflation-linked revenues. Investments in higher-risk growth assets will be limited. It intends to monetise existing positions in platforms such as the Glasshouse, Rjukan, and CNG Fuels when they reach maturity and can command premium valuations. The portfolio will instead focus on income-generative assets and value enhancement at operational sites.

Investment manager’s fees change from 1 October 2025, where the base management fee will be calculated on a blended metric of 50% NAV and 50% market capitalisation (capped at NAV), replacing the previous NAV-only basis.

Conclusion

I am trying not to say meh. Oops just said it.

FGEN has a 10% yield, and the share price is up from a 66p low to 80p a share but there’s still a 31% discount to NAV. The discount rate and the power price assumptions make that 106.5p very likely to be understated. There are various assets coming on line in FY26 too. FGEN have said they are going to stick to their knitting with inflation-linked returns.

I’m just not convinced that there’s any great upside here. The investment manager manages to say a lot and presents well but leaves me not feeling excited. I previously said that FGEN is “a decent way to earn solid dividends and where the margin of safety appears higher than the market perceives.” I still believe that that’s true. Even more so today.

So FGEN appears a trusty plodder but not an Arabian thoroughbred. What horse do you want in your portfolio?

Regards

The Oak Bloke

Disclaimers:

This is not advice – make your own investment decisions.

Micro cap and Nano cap holdings, even FTSE250 companies like SEIT, might have a higher risk and higher volatility than companies that are traditionally defined as “blue chip”

Back below £1, is this FTSE 250 stock an unmissable passive income opportunity?

Stephen Wright thinks two FTSE 250 REITs looking to merge could be an interesting opportunity for investors looking for passive income to consider.

Posted by Stephen Wright

Published 25 June

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.

After falling almost 5% in a day, Primary Health Properties (LSE:PHP) has slipped back to 99p. But the FTSE 250 real estate investment trust (REIT) has had some potentially big news.

It looks as though the firm has managed to hijack KKR’s takeover of fellow healthcare REIT Assura (LSE:AGR). And the result could be a very interesting stock for passive income investors.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

M&A activity

There has been a lot of interest in UK REITs over the last few months. As well as Assura, Care REIT, Warehouse REIT, and Urban Logistics REIT have all been attracting attention.

After a short bidding war, Assura announced it intended to accept a best-and-last offer of £1.7bn from a consortium led by  US investment firm KKR. But it’s now switched courses.

Officially, the preferred offer from Primary Health Properties values the company at £1.8bn. There are, however, a couple of things to keep an eye on. 

The deal involves merging the two companies to create a much bigger healthcare REIT. And Assura shareholders are set to receive the following (for each share they currently own):

• 12.5p in cash
• A 0.84p special dividend
• 0.3865 shares in the combined company

The firm currently has a market value of £1.62bn – around 10% below the proposed takeover price. But the final value of the deal depends on what happens to the Primary Health Properties share price.

With that in mind, I’m not looking for a quick win based on the deal going through. But I am interested in the combined company as a potential long-term passive income opportunity. 

Passive income

In their current forms, Assura and Primary Health Properties are very similar businesses. Both make money by owning and leasing portfolios of healthcare properties – notably GP surgeries.

There’s a slight difference in terms of the balance of state (mostly NHS) and private tenants. But combining the two clearly offers some benefits of scale for shareholders.

The similarities between the two businesses mean they also have similar risk profiles. Both use their reliable income stream to operate with unusually high debt levels. Assura and Primary Health Properties both have net debt levels roughly equal to their entire market value. That’s something investors need to factor into their calculations.

Both stocks currently have dividend yields of around 7%. So even if the combined company has to issue shares to pay off some of its debt, investors might still hope for a good return.

An aging population and the UK government’s desire to use private healthcare to try and reduce NHS waiting times should both be benefits. As a result, I think this is an interesting opportunity.

Which stock to buy?

I’ve owned shares in both Primary Health Properties and Assura in the past, but I’ve since sold both. Looking back, I think that was probably a mistake. The merger of the two companies could well be my chance to get back in. But I have a clear preference for which stock I prefer at this stage.

There’s still a risk the deal doesn’t go through. And in that situation, I expect both share prices to go back to where they were before the latest news. That means up (slightly) for Primary Health Properties and down (slightly) for Assura. So to cover that possibility, I think I prefer the former.

The Snowball has profits in

Assura of £2,925.00 and PHP £2,281.00, which now re-invested back into the Snowball will accelerate the planned timescale.

One to watch ?

How I could live off dividend income alone !

Dr James Fox explores whether it would could be possible to generate enough dividend income to live comfortably and stop working.

Posted by Dr. James Fox

Published 30 May, 2023

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.Read More

Like many investors, I receive dividend income from the stocks I own. In my case, dividend-paying stocks represent the core part of my portfolio. But just how much would I need to earn from dividends to live off this income alone? And would it be possible?

Let’s take a close look.

How could it work?

Well, I’d want to build a portfolio of dividend stocks that collectively pay me enough money to live from. Let’s say this is £30,000, but I appreciate this might not be possible in London.

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

And I’d want to be doing this within an ISA wrapper. That’s because any capital gains, dividends, or interest earned within the ISA portfolio is tax-free.

So, if I was earning £30,000 from dividends, I’d actually be taking home more money than someone on a £45,000 salary — including student loan repayments.

Of course, unless I picked specific stocks, I wouldn’t expect this income to be spread evenly across the year. At this moment, the majority of my portfolio’s income comes around April and May, shortly after the end of the financial year. So that’s something to bear in mind.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

What would it take?

Well, to earn £30,000, I’d need to have at least £375,000 invested in stocks. That’s because I believe the best dividend I can achieve is around 8%. This would involve investing in companies, like Legal & General, that don’t offer much in the way of share price gains.

But what if we don’t have £375,000? And let’s face it, the majority of us don’t.

Well, I’d need to build a portfolio over time. And I could do that using a compound returns strategy. This involves reinvesting my dividends and earning interest on my interest. It’s very much like a snowball effect. 

Naturally, there are several key variables here. The starting figure, the yield I can achieve, and the amount of money I contribute from my salary every month.

If I started with £10,000 and stocks yielding 8%, in theory I could reach £375,000 in 19 years. But this would require me to contribute £400 a month and increased this contribution by 5% annually throughout those 19 years.

And by contributing £400 a month, I’d fall way under the maximum annual ISA contribution of £20,000.

Compound returns isn’t a perfect science, and as with any investment, I could lose money. But it’s certainly safer than investing in growth stocks.

About the stocks

Of course, the above is great in theory, but I’d need to pick the right stocks. I’m looking for stocks with strong dividend yields, but I also need to be wary. Big dividend yields can be a warning sign, and the dividend coverage ratio is a good place to start.

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

REGIONAL REIT Ltd.

(“Regional REIT”, the “Group” or the “Company”)

Lettings Update

Regional REIT (LSE: RGL), the regional property specialist, is pleased to announce that it has secured seven new lettings and eight lease renewals across its portfolio since the trading update on 15 May 2025. The fifteen transactions deliver a total annual rental income of over £1.6m and represent a 6.32% increase above estimated rental values, demonstrating the impact of the Group’s active asset management strategy.

Stephen Inglis, Head of ESR Europe LSPIM Ltd., Asset Manager commented:

“This letting activity underscores the effectiveness of our capital expenditure strategy, securing rents above ERV. The lease renewals also announced today reflect the quality of our existing properties and strong relationships with our occupiers.

As demand continues to grow for sustainable, well-located and high-quality regional office space, and given the diminishing supply, Regional REIT is well-positioned to harness this momentum and deliver lasting value for shareholders, including the distribution of our attractive and fully covered dividend.”

The Snowball expects to earn income of 10k this financial year, which will be three years ahead of the written plan.

The fcast for next year will be £10,500.00 and the target yet to be decided.

I bought 4,545 shares in this FTSE 100 dividend gem in 2020. Here’s how much passive income I’ve had since…

I bought shares in this FTSE 100 financial giant in 2020 based on high passive income potential and major share price undervaluation. I’m very happy I did.

Posted by Simon Watkins

Published 24 June

LGEN

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.

I bought £10,000 of Legal & General (LSE: LGEN) shares in June 2020, principally for their passive income potential.

This is money made with little effort, most appositely in my view with dividends paid by shares. The only real work on my part is selecting the stocks in the first place and then monitoring their progress.

I had already built up a stake in the financial services giant over previous years, in increments of £5,000. However, given how well it had performed – and its forecast earnings at that point – I decided to double my holding.

After all, earnings are the key driver for any firm’s share price and dividends over time.

Looking back I am very happy with my decision.

How much dividend and other income have I made?

In Legal General’s case, my £10,000 bought me 4,545 shares at the 24 June 2020 opening price of £2.20.

Since then the firm has paid a total of 97.09p in dividends. This has given me £4,413 in dividends – a return of 44% over the five years.

In addition, I have made a profit on a rise in the share price too. This was not altogether unexpected, as I only buy stocks that look significantly undervalued to me.

The primary aim of this in my passive stocks is to minimise the risk that I lose dividend gains through share price losses. However, it also conversely increases the chance that I may make a profit on the share price as well.

This has been the case with Legal & General, which now trades at £2.52. It gives me an additional profit of £1,454 on the share price.

This, added to the dividends made, means a total profit of £5,867 over the five-year period – a near-60% return.

What’s the dividend income outlook?

A risk for Legal & General is the intense competition in its sector, which may squeeze its margins.

That said, consensus analysts’ estimates are that its earnings will grow a spectacular 27.9% a year to end-2027.

The forecasts are that the firm’s dividends will rise to 21.8p this year, 22.3p next year, and 22.6p in 2027. This would generate respective yields on the current share price of 8.7%, 8.9%, and 9%. The dividend for 2024 was 21.36p, giving the current yield of 8.5%.

If the shares averaged this 8.5% yield over the next 10 years, then my £10,000 would make £13,326 in dividends. And if it averaged the same over 20 years I would make £44,412.

This is based on me reinvesting the dividends into the stock – known as ‘compounding’. But I have to take into account that none of this is guaranteed.

What about the share price prospects?

Legal & General shares continue to look extremely undervalued to me.

More specifically, a discounted cash flow analysis shows they are 56%undervalued at their current £2.52.

Therefore, their fair value is technically £5.73.

Consequently, given its strong earnings prospects – and what this should mean for its share price and dividends — I will buy more of the shares very soon.