3 FTSE 100 dividend stocks trading at bargain levels

Roland Head takes a look at three FTSE 100 (INDEXFTSE:UKX) stocks with 6% yields and attractive valuations.

| More on:

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

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the FTSE 100 trading at record highs, the average dividend yield offered by the big-cap index is falling. And some of the remaining high-yield stocks look decidedly risky to me.

In this article, I’m going to look at three high-yield stocks which I believe offer attractive upside potential.

Neil Woodford’s top financial

Legal & General Group (LSE: LGEN) was fund manager Neil Woodford’s biggest financial holding at the end of December, accounting for 5.5% of his Equity Income Fund.

Should you invest £1,000 in Direct Line right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Direct Line made the list?

See the 6 stocks

In my view, it’s easy to see why Mr Woodford is attracted to this life insurance and asset management group. The group’s generous dividend is covered around 1.5 times by earnings. Legal & General is expected to pay a 14.3p dividend with respect to 2016, giving a forecast yield of 5.9%.

A second attraction is that Legal & General’s earnings growth has been stronger than you might expect. The group’s scale has enabled it to win a number of large bulk annuity deals, offsetting the impact of changes to pension rules.

L&G’s earnings per share have risen by about 45% since 2012. The group currently trades on a forecast P/E of 11.5 with a prospective yield of 5.9%. I rate this stock as an income buy.

The outlook is improving

Utility group SSE (LSE: SSE) has struggled to maintain dividend cover and protect its policy of inflation-linked dividend growth over the last few years. But the outlook is improving. This year’s forecast payout of 91.4p per share is expected to be covered 1.3 times by earnings of 121.5p per share.

One risk that may be worth watching is that SSE’s customer numbers are falling. The total number of energy customers fell by 1.5% to 8.08m during the nine months to 31 December. Average electricity and gas consumption rose over the same period, offsetting some of these losses. But it would be good to see evidence that SSE can stem the outflow of customers.

Despite this concern, I believe SSE looks attractive at current levels. The stock trades on 13 times forecast earnings, with a prospective yield of 5.9%. That seems reasonable to me.

Further gains likely

Shares of Direct Line Insurance Group (LSE: DLG) have risen by more than 80% since the firm floated in 2012. The group has established a solid reputation among investors since joining the market.

One reason for this is that Direct Line has managed to balance the conflicting demands of growth and profitability. This has improved the group’s return on equity and generated surplus cash for special dividends.

Direct Line is expected to pay a total of 31p per share in dividends for 2016. This equates to a massive forecast yield of 8.5%. Some caution is necessary here, as around half of this payout is likely to be in the form of a special dividend. These payments vary depending on surplus cash generation. Unlike the group’s ordinary dividend, shareholders shouldn’t expect special dividends to rise every year.

Notwithstanding this, I believe Direct Line could be an attractive income pick at 370p. The shares’ forecast P/E of 11.5 looks undemanding to me. The yield should be high enough to compensate for limited near-term earnings growth.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

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…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of SSE and Legal & General Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Up 20% in a month, should investors consider buying Marks & Spencer shares?

Shares in retailer Marks and Spencer have surged ahead over the last month, despite a cyberattack. Roland Head takes a…

Read more »

Charticle

Here are the latest growth and share price targets for Nvidia stock

Ben McPoland checks out the latest forecasts for Nvidia stock to assess whether it might be worth considering for a…

Read more »

Growth Shares

Yikes! This could be the most undervalued growth stock in the FTSE 100

Jon Smith flags up a growth stock with a low price-to-earnings ratio and a share price back at 2020 levels…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

3 beaten-down FTSE 250 shares to consider buying before the next bull market

Paul Summers thinks brave investors should ponder buying some of the FTSE 250s poor performers before they recover strongly.

Read more »

Investing Articles

Gold prices soar while the Fresnillo share price slumps. What gives?

With a gold bull market in full swing, this Fool argues that the falling Fresnillo share price may not remain…

Read more »

Investing Articles

2 FTSE 100 shares I’m avoiding like the plague right now

While the FTSE remains packed with opportunity, many of the index's blue-chip shares could be at risk as trade tariffs…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Here’s how an investor could aim for a million buying under 10 shares

Christopher Ruane explains why doing less, not more, of the right things could be the key to success as an…

Read more »

Investing Articles

Could this new risk cause a stock market crash?

Tariffs and a potential recession are two major stock market risks right now. But there’s another risk that concerns Edward…

Read more »