Today I'm taking a look at one of the FTSE 100's largest constituents Legal & General(LSE: LGEN).
I reckon this asset management and insurance behemoth is one of the best dividend stocks in the UK. And it's not just the firm's 6.7% dividend yield that's convinced me.
A business built to last
Legal's biggest advantage is the company's size. The £15.3bn-market-cap enterprise manages nearly £1trn in assets for clients. This sheer scale means it can take on business and offer incentives not available to other companies.
These include the bulk annuities business, which involves taking on pension liabilities from other corporate schemes. The company did a total of £4bn of annuity business last year and, after completing on £1.1bn of deals in the first half, management is in talks for another £7bn of bulk deals.
The group's asset management business is also experiencing rapid growth. Profits here increased 5%, thanks to £12bn of net inflows in the first half. No doubt, savers are reassured by Legal's size.
That said, a downside to being one of the UK's largest financial businesses is a lack of growth.
As the saying goes, elephants can't gallop, and Legal is no different. City analysts believe the company's EPS growth will settle at between 8.5% and 7% for the next two years. This growth might look slow compared to some of the market's high-flying tech stocks, but for such a large business I think it's impressive.
Also, this steady earnings expansion will support dividend growth, which analysts believe will increase by an inflation-busting 6.5% for the next two years.
Legal's steady earnings growth and 6.7% dividend yield are more than enough to convince me that this company is worth including in any retirement portfolio. A prospective earnings multiple of just 8.6 only adds to the appeal.
Making money from junk
Phoenix Group Holdings(LSE: PHNX) operates a similar business to Legal, but is in an earlier stage of life.
Phoenix managers life insurance businesses that are no longer open to new customers, a tedious, complicated business other firm's are only too happy to get out of. Indeed, Phoenix is currently in the process of swallowing Standard Life Aberdeen's insurance business. That comes after its larger peer decided it no longer wants the hassle of running its legacy insurance businesses.
Phoenix's specialisation gives it an edge in the market for life insurance and, thanks to this edge, profits are surging. Today, the company reported that it now expects to exceed the upper end of its cash generation target of £1bn to £1.2bn between 2017 and 2018. Cost savings of £27m from the £3.2bn Standard Life deal have helped push earnings higher.
Phoenix stands out because of its cash generation. In my view, cash-generative businesses like Phoenix make the best income investments.
City analysts seem to agree. They have the company paying out around 46p per share to investors during 2018, and a similar amount for 2019. This gives the stock a dividend yield of 6.6%. A prospective earnings multiple of 24.3 times doesn't make it cheap. But I believe Phoenix's cash generation more than justifies this premium.
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Rupert Hargreaves owns shares in Standard Life Aberdeen. 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.