Why Legal & General is one of my top FTSE 100 dividend stocks

Edward Sheldon explains why he thinks investment manager Legal & General Group plc (LON: LGEN) is one of the best income stocks in the FTSE 100 (INDEXFTSE: UKX).

| 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.

Shares in insurance and investment specialist Legal & General Group (LSE: LGEN) currently offer a high dividend yield of 5.8%. That’s attractive in today’s low-interest-rate environment. Here’s why I think the stock is currently one of the best dividend stocks in the FTSE 100.

Strong yield

For starters, Legal & General’s dividend yield is considerably higher than your average FTSE 100 stock. According to research platform Stockopedia, the median dividend yield across the FTSE 100 is 2.8%. At 5.8%, Legal & General’s is over twice that, meaning investors in the stock are pocketing some big cash payouts.

Sometimes, you need to be a little careful with high-yielding stocks. They can be a signal that the market thinks a dividend cut is coming. A good example is BT Group, which currently yields nearly 7% — investors clearly have their doubts about the dividend. Yet, in Legal & General’s case, the dividend looks sustainable, to my mind. The group is generating significant cash flow and earnings last year were 1.5 times the dividend payout. So there’s a solid margin of safety there.

Dividend growth

When investing for dividends, one important thing to look for is dividend growth and Legal & General has a good track record of increasing its dividend over time. The company did cut its payout during the Global Financial Crisis (as did a lot of financial services firms) yet since then, the group has registered eight consecutive annual dividend increases, lifting the payout from 3.8p per share to 15.4p per share.

Looking ahead, there’s a good chance investors will see even higher dividends in the next few years. City analysts currently expect the group to raise its dividend by 6.5% this year, and 6.4% next year. That’s good news for investors who rely on dividends for income as their income from the stock is likely to grow at a faster rate than inflation. In other words, they won’t lose purchasing power over time as prices rise.

Growth story

Legal & General also has a growth story that investors appear to be ignoring right now. You see, not only is the FTSE 100 company a market leader in insurance and investment management. It also specialises in ‘bulk annuity’ retirement solutions, where it takes defined benefit pension schemes off the balance sheets of corporate clients in exchange for a fee. This is a major opportunity for the company, both in the UK and internationally, and it looks well-placed to capitalise, completing £3.4bn worth of pension transactions last year alone. The group has also aligned its businesses to a number of growth drivers including the ageing population and technology innovation and, therefore, looks well positioned to enjoy robust growth over the long term. 

Low valuation

Despite the compelling growth story and the stock’s blockbuster yield, the shares are cheap. With analysts expecting the company to generate earnings of 27.8p per share this year, the forward P/E ratio is just 9.6. That’s a bargain, in my opinion.

Of course, like any stock, there are risks to the investment case. For example, if markets tumble, profitability could be impacted negatively. However, given the low valuation and strong yield, I think the risk/reward proposition is attractive.

For more investment ideas like this, feel free to download the free report below that has been put together by our top analysts.

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.

Edward Sheldon owns shares in Legal & General Group. 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

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »