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

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.

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.

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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.