This FTSE 100 dividend stock yields almost 7%, here are 3 reasons why I’d buy

Roland Head explains why he’s keen on this FTSE 100 (INDEXFTSE:UKX) income pick.

| 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.

The recent market sell-off has created some good buying opportunities for income investors, in my opinion. Today, I’m going to look at two stocks I’d be happy to add to a dividend portfolio.

First up is FTSE 100 dividend titan Legal & General Group (LSE: LGEN). Shares in this savings and insurance firm have fallen by 11% so far this year, broadly in line with the wider market. I think this stock has the potential to be one of today’s top big-cap dividend buys. Here’s why.

Good value, positive outlook

In my view, the easiest way to get rich from stocks is to buy good, cheap companies. Legal & General certainly looks cheap. The firm’s shares currently trade on 8 times 2018 forecast earnings.

Passive income stocks: our picks

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

A valuation like this sometimes indicates that earnings are expected to fall. But that’s not the case here. Broker earnings forecasts for 2018 have risen by 20% over the last year. Forecasts for 2019 have risen by a similar amount, and suggest that earnings will rise by 7% next year.

Highly profitable, quality business?

We’ve seen that Legal & General is cheap. Is it a good business too? The firm’s profit margins certainly suggest so. Return on equity — a key measure of profit for financial firms — has averaged 18% over the last six years. These high returns have fuelled the group’s growth and provided cash for generous shareholder returns.

Dividend growth + high yield

Legal & General’s dividend payout has doubled since 2012, providing an inflation-beating income for long-term holders. Although dividend growth is now expected to slow, this year’s payout is still expected to rise by about 6.5%. That’s more than double the rate of inflation.

The firm’s distributions are covered by surplus cash, too. Last year’s payout cost about £910m. This was comfortably covered by the £1.352bn of surplus cash, released from the group’s operations over the same period.

I’d buy, but here’s a second choice

I rate Legal & General as a buy. But if you want to generate a generous yield from financial stocks, there are some alternatives.

One small-cap that may be of interest, is currency-hedging specialist Record (LSE: REC). This £60m firm helps manage its clients’ exposure to exchange rates. It’s highly specialist and has proved very profitable in recent years.

According to half-year figures released today, Record generated an operating margin of 32% during the six months to 30 September. This impressive figure is consistent with the firm’s profit margins in recent years, so there’s no reason to think it’s not sustainable.

A cash machine

These high margins mean that Record generates a lot of cash. The group had net cash of £12.9m at the end of September, or £22.7m including longer-term money market investments.

The only problem I can see with Record is that it’s struggled to deliver much growth over the last couple of years. There’s no sign of this changing just yet, either.

Today’s half-year results show assets under management are broadly unchanged, at $61.8bn. An increase in client numbers between April and September is set to be reversed during the second half of the year.

Record looks cheap to me, with a price/earnings ratio of 12 and a dividend yield of 8%. But I wouldn’t expect too much growth. I’d buy for income only.

Our analysis has uncovered an incredible value play!

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

British Isles on nautical map
Investing Articles

This industrial giant is the UK’s largest business, but it’s not a FTSE 100 stock!

The FTSE 100 index is an obvious place to look for Britain's biggest companies, but the most valuable UK stock…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

Here’s a 5-stock FTSE 100 portfolio that could generate £800 a month in passive income

Mark Hartley calculates the potentially lucrative returns of five popular FTSE 100 dividend stocks invested in a Stocks and Shares…

Read more »

Investing Articles

Up 40% in 2025, is this 1 of the best cheap UK shares to consider buying right now?

Looking for UK shares to cash in on the gold rush could be a great idea to consider. Here's one…

Read more »

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Dividend Shares

Is it wrong for me to buy these FTSE 100 tobacco stocks?

These two FTSE 100 tobacco stocks have thrashed the wider UK market over one and five years. But would it…

Read more »

Investing Articles

Is this a great opportunity to lock in big dividend yields for a second income?

Dividend yields rise as share prices fall. That’s why many investors will see a bear market or correction as an…

Read more »

Investing Articles

How much could a 30-year-old ISA investor have if they invested £500 a month until 60?

Generous tax advantages mean Stocks and Shares ISA investors can boost their chances of enjoying an early retirement.

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

After collapsing 28% today, are Bunzl shares too cheap to ignore?

A poor trading statement has sent Bunzl shares to multi-year lows. Could now be a good time to consider investing…

Read more »

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »