Is Legal & General Group plc the best dividend stock in the FTSE 100?

The FTSE 100 is trading at record highs, but that doesn't mean that all the stocks in the index are expensive. I believe pockets of value and high-yield dividend opportunities are still available for active investors.

///>

The two companies I'm looking at today are both stocks I hold in my own portfolio. They're well-known firms that offer yields of between 5% and 6% and have strong balance sheets. In my view they are two of the best dividend buys in the FTSE 100.

A market leader

After-tax profits rose by 16% to £1,265m at pension and investment firm Legal & General (LSE: LGEN) last year. It generated surplus cash of £1,411m in 2016, 12% more than in 2015.

A key measure of profitability for financial firms, adjusted return on equity, rose from 17.7% to 19.6%.

Chief executive Nigel Wilson remains bullish about the future. Mr Wilson told investors on Wednesday that "our core markets are growing [and] our market share is increasing."

The firm's results seem to back up these claims. They also demonstrate the advantages of scale, especially in Legal & General's core annuity business. Annuity assets rose by 25% to £54.4bn last year, helped by some big corporate deals such as a £3bn acquisition from Aegon.

The company says that it sees strong growth opportunities, especially in the retirement sector where it aims to help fill "huge funding gaps". In my view, Legal & General's strong cash generation and continued growth make it an appealing choice for income.

The 2016 dividend will rise by 7% to 14.35p per share, giving a yield of 5.7%. This payout will cost the group about £854m, so it's comfortably covered by last year's cash generation of £1,411m.

Legal & General's share price has stood still so far this year. But with a forecast P/E of 11.5 and a prospective yield of almost 6%, I believe the stock deserves a buy rating.

Will change come fast enough?

When Royal Mail (LSE: RMG) floated in 2013, politicians and tabloid newspapers were quick to suggest that this valuable asset had been given away on the cheap.

Three-and-a-half years after the shares floated at 330p each, they have not exactly soared. They currently trade at 400p, giving IPO shareholders who haven't sold a gain of 21% plus dividends.

Royal Mail has underperformed over the last six months because investors are questioning its ability to profit from the shift towards parcels and away from letters. Revenue in the group's main parcels and letters division fell by 2% during the nine months to 25 December. A 3% rise in parcel revenue was not enough to outweigh a 5% fall in letter revenue.

Royal Mail's large, unionised workforce and letter-oriented infrastructure mean that low-cost courier groups are tough competition.

As a shareholder I'm concerned about the speed of the group's transformation. But I believe that current gloomy forecasts are underestimating the ability of this 500-year old business to adapt to change.

Royal Mail's balance sheet remains strong, with £2bn of fixed assets and low levels of debt. The group's free cash flow has covered its dividend since its flotation. With a forecast yield of 5.7% and a P/E of 10.6, I believe the shares are a contrarian buy at current levels.

Which FTSE 100 dividend stock should you buy?

I'm bullish about both Legal & General and Royal Mail. But both carry certain risks. Our top analysts have identified five FTSE 100 income stocks which they believe can provide evergreen performance with less chance of unexpected downturns.

The companies they've chosen include a pharma stock and a consumer goods group. But you may be surprised when you see the full selection.

For a limited period only, this essential investment report is available FREE and without obligation. To download your copy today, click here now.

Roland Head owns shares of Legal & General Group and Royal Mail. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.