I feel the perfect passive earnings shares are those which might be more likely to pay above-average dividends for a sustained time period.

And since 2019, Authorized & Normal (LSE:LGEN) has been doing simply that. Throughout this era, it’s elevated its payout yearly — besides in 2020, when it was unchanged because of the pandemic.

For the yr ending 31 December 2024 (FY24), it’s meaning to pay 21.36p a share. In money phrases, that is greater than 4.5 instances larger than its dividend for FY09.

Impressively, the common annual enhance since 2015 has been 8.3%.

Chart by TradingView

And with a present (18 October) share price of 230p, this means a yield of 9.3%. That is comfortably above the common for the FTSE 100 of three.8%.

However an growing dividend and a stagnant (or falling) share price will push the yield larger. Of concern, in October 2015, the monetary providers supplier’s shares have been altering arms for 7% greater than they’re immediately.

Nonetheless, because the chart under exhibits, even bearing in mind the disappointing share price efficiency, the inventory has at all times yielded a minimum of 4.5%, since 2015.

Chart by TradingView

Trying to the long run

However the firm’s warned traders that the dividend is simply going to extend by 2% a yr by till FY27.

Though it claims that its deliberate share buyback programme will profit traders by greater than the equal of accelerating its annual payout by 5%, personally, I’d somewhat have the money in my hand.

Nonetheless, dividends are by no means assured.

And Authorized & Normal’s notably susceptible to an financial slowdown. Increased rates of interest have helped its annuity enterprise however elevated borrowing prices are usually dangerous for its different divisions.

Its incomes suffered throughout the 2008-2009 monetary disaster and it needed to lower its payout in consequence.

The group additionally operates in a extremely aggressive market the place competitors is fierce and earnings may endure in consequence. In the course of the first six months of 2024, the group reported a web outflow of funds beneath administration.

An encouraging outlook

However there are two elements of its enterprise that make me assured that it will probably develop its earnings over the medium time period, which ought to assist keep the wholesome dividend.

Firstly, its pension danger switch arm has an enormous pipeline of potential offers (£24bn). The corporate hopes to generate profits from these belongings by producing greater than the retirement advantages it has to pay.

Secondly, the potential earnings — referred to as the “store of future profits” — from its insurance coverage enterprise was £14.7bn, at 31 December 2023. That is the current worth of the money flows it expects to generate over the lifetime of its contracts. Though this calculation is delicate to the assumptions made, I feel it’s price noting that it’s greater than the group’s present market cap (£13.5bn).

Closing thought

The headline to this text poses the query as as to if Authorized & Normal is the ‘ultimate’ passive earnings inventory.

It is a excessive bar to achieve. And there are some shares providing a greater return and some — not many — with an extended observe file of rising their dividends.

For these causes, I’m going to say that it’s one in all the perfect dividend shares round. And that’s why it’s on my watchlist for once I’m subsequent ready to take a position.