Legal & General (LSE: LGEN) shares recently went ex-dividend, with investors set to receive the interim dividend payment next month from the insurer.
The company continues to sport the highest dividend yield in the FTSE 100 at 7.7%, making it one of the most prominent income stocks available to UK investors right now.
Despite that attractive yield, some shareholders are weighing whether to reduce or exit their positions entirely, given a series of headwinds that have emerged in recent weeks.
The share price briefly surged above 300p for the first time in nearly five years, hitting 318p, briefly handing investors both capital gains and high-yield dividends simultaneously.
That rally proved short-lived, however, with the stock subsequently falling almost 10%, retreating to levels last seen in mid-June before the brief surge.
Multiple brokers moved quickly to pour cold water on the rally, arguing that the stock did not look attractive at the elevated price level.
The caution is not entirely surprising, given that Legal & General has underperformed the FTSE 100 over the past five years, even when dividends are factored in, delivering an annualised total return of 7.8% versus 12.8% for the wider index, according to AJ Bell.
A key concern among cautious analysts centres on growing competition in the pension risk transfer market, where Standard Life recently expanded through a partnership with CVC, Prudential Financial, and Goldman Sachs to participate in larger transactions.
Pressure on asset management fees for passive tracking products adds another layer of difficulty, with some brokers now questioning the sustainability of the dividend over the medium term.
Jefferies holds the most bearish position, with a 191p price target on the stock, representing a 32% discount to the current share price, and questions whether operational surplus capital will adequately cover shareholder returns while also supporting capital-hungry pension risk transfer deals.
Not every analyst shares that pessimism, however, with one broker holding a significantly higher target of 385p, suggesting the outlook is far from uniformly negative.
The pension risk transfer market itself remains vast, with over £1.2 trillion of defined-benefit pension liabilities in the UK yet to be transferred to insurers, according to CVC, ensuring long-term structural demand.
Yet with competition intensifying and potentially compressing margins, questions about whether the share price can sustain any meaningful upward momentum remain difficult to dismiss.
Investors already holding other UK dividend stocks such as Aviva, HSBC, and LondonMetric Property may find those alternatives offer safer dividend sustainability profiles, even if their starting yields are lower.
The Legal & General dividend does appear secure in the near term, with the payout expected to edge up 2% next year, pushing the forward-looking yield to nearly 8%.
One approach under consideration involves selling half of a holding in the coming days and then waiting for the company’s Q3 update, due in November, before deciding whether to exit entirely if the results prove mixed.
With the FTSE 350 currently offering a range of high-yield income opportunities, investors reassessing their Legal & General position have no shortage of alternatives worth exploring.