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

Businessman using calculator next to laptop
Businessman using calculator next to laptop

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.

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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.