Earning £760 a year in passive income from a £10,000 investment sounds tempting.

But after Legal & General (LSE:LGEN) shares surged 30% in a year and then fell from 320p to 292p in a handful of weeks, investors have to ask a different question: is that income worth the risk if the FTSE 100 stock has already peaked? Especially when the analysts are so bearish.

Here’s why I think the asset manager could still be a tempting passive income stock – and the risk that income investors need to understand first.

The cash cow’s changing

The big money-spinner that’s pension risk transfer (PRT) is still doing its job. The retirement business has written around £95bn of pension deals over the past decade, and first-half volumes remain strong.

Management’s still winning new business, but admits that the profit margins on those deals have fallen. That’s because the gap between what it can earn on corporate bonds and the risk-free government rate has become much smaller.

And there’s another catch. Competition’s getting tougher.

The company says it can make up for some of that through other investment profits over time. And a huge £1.2bn share buyback, the largest in its history, has boosted returns to shareholders too.

But that raises an interesting question. Has the 23% yearly share-price surge reflected a stronger long-term growth story? Or have good results, a generous 7.6% dividend yield, and an expected £2.4bn of shareholder returns this year simply pushed the shares as far as they can go for now?

That’s the risk income investors are being paid to take.

The dividend test

If the dividend’s the reason to own the shares, the latest numbers are reassuring. Solvency II operational surplus generation per share rose 7% in the first half, while core operating EPS increased 11%. More importantly, the solvency ratio stood at 201% at the end of June, comfortably above management’s 160%-190% target range.

These numbers are key because, ultimately, it’s the capital generated by the business that supports shareholder returns. So that juicy yield doesn’t look obviously unsustainable today.

Analysts at JP Morgan argue that Aviva is generating superior free cash flow on some of these key measures. But comparing the two businesses isn’t straightforward. Aviva’s a much more diversified insurer, with a large general insurance division alongside its other operations.

L&G’s diversifying too. Its workplace pensions business, for example, is growing strongly. But it’s still small compared with PRT. And that’s the conundrum. The dividend looks well supported today, but the biggest engine generating that capital is also the part of the business facing the greatest pressure on margins.

Bottom line

I’ve held Legal & General shares for years and plan to keep them. For an investor focused on income though, the recent share-price fall is a reminder that a 7.6% yield isn’t a free lunch.

My view is different over the longer term. Ageing populations and pension trustees looking to reduce risk should continue to create demand for its businesses. The balance sheet’s strong and capital generation remains healthy. But with the shares having already risen strongly, I think there are better opportunities to look at elsewhere within the FTSE 100.

Should you invest £5,000 in Legal & General Group Plc right now?

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Andrew Mackie owns shares in Legal & General.