FTSE 100 dividend stocks are regarded by investors worldwide as a reliable avenue for both income generation and capital appreciation.
As we move into the month of September, I’m turning my attention to identifying the most promising dividend-paying stocks within the UK’s blue-chip index.
While there are a handful of worthy contenders, I’m convinced that Legal & General (LSE:LGEN) surpasses them all. Here’s why.
Strong financial performance
The market’s reaction to the group’s half-year results last month seemed a little harsh to me.
The financial services provider beat operating profit expectations despite a 2% drop to £941m.
All in all, the alternative asset portfolio did well and so did the retirement business.
The solvency II coverage ratio, which is a core measure of capitalisation and balance sheet strength, rose from an already impressive 212% to 230%.
In my view, this puts Legal & General in a very solid financial positions despite the challenges.
All four of the group’s divisions are well-positioned to continue to execute on structural market opportunities. Consequently, further profitable growth over the medium and long term looks feasible to me.
An attractive dividend yield
Beyond this, the shares boast a handsome prospective dividend yield of around 9%.
Moreover, I’m a big admirer of the company’s progressive payout policy. Among other things, it includes a target to grow dividends at 5% a year.
Perhaps more importantly, the group’s dividend remains comfortably covered by earnings. But as with any business, dividends aren’t guaranteed.
In any case, Legal & General faces the same risks as any other insurer that could force it to cut or cancel its dividend amid unforeseen circumstances.
Seriously undervalued shares
Despite a decent set of financial results and a generous dividend policy, I think Legal & General shares could be significantly undervalued.
For example, the group’s price-to-earnings (P/E) ratio currently sits at around 5.7, which is below the FTSE 100 average.
This suggests to me that, at present, the market is undervaluing the firm’s earnings potential.
If that’s the case, I’d be well-positioned to benefit from some long-term capital appreciation. But that’ll depend on improved market sentiment resulting in the true value of the shares being recognised.
After all, investing in undervalued shares still carries risks, and not all undervalued stocks ultimately appreciate in value.
A bright future outlook
Looking ahead though, I’m confident in the long-term outlook for Legal & General. I’m also a big fan of the group’s business strategy, which is placing a greater emphasis on technological innovation.
To illustrate, the group is committed to becoming the UK market leader in the digital provision of insurance, while simultaneously growing its presence in the US and expanding in adjacent markets.
As technological innovation makes the group’s products more accessible to customers and digital transformation creates a competitive advantage for it in the US market, I expect continued premium growth across both the British and American protection businesses.
It’s for these reasons that if I had some spare cash in September, I’d snap up a handful of Legal & General shares and aim to hold them for the long term.
