Why I see more upside ahead for Legal & General Group plc

With the stock market trading near record highs, it's become increasingly difficult to find reasonably priced dividend stocks to invest in. After strong recent gains, it's unsurprising that many stocks now appear to be overvalued.

Thankfully, there are still some attractive dividend stocks available if you're willing to look hard enough. And one FTSE 100 stock out there which seems to fit the bill is Legal & General(LSE: LGEN).

The investment and pension group's fundamentals are attractive as demand for private pensions grows and the group's capital position strengthens. As such, management is confident of sustaining 10% per annum earnings growth over the next four years.

Dividend growth

Dividends from the company have grown by a compound annual growth rate (CAGR) of 16% over the last three years, and its shares now boast a dividend yield of 5.4%. Looking ahead, City analysts expect annual dividends per share to grow by 7% over the next three years, which would give its shares a highly tempting prospective yield of 6.5% by 2019.

But are these expectations realistic? Probably. The company has delivered robust double-digit earnings growth year-after-year and dividend growth has historically been even faster. What's more, cash generation has been rapidly improving, leading its Solvency II coverage ratio to rise to 186% in the first half of 2017, from 171% in December 2016.

And although Brexit uncertainty may weigh on its near-term outlook, I reckon its longer-term growth prospects remain intact because of the long-term structural and demographic growth drivers. As such, I believe its shares could prove to be a strong performer over the medium term.

Moreover, Legal & General shares are fairly valued, trading at just 10.6 times forward earnings.

Another great pick

Elsewhere, I think public transport operator National Express(LSE: NEX) is another great dividend growth pick.

National Express has an alluring earnings outlook, with the company forecast to post underlying earnings per share growth of 7% and 8% in 2017 and 2018, respectively. Valuations seem reasonable too, with the stock trading at just 12.2 times expected earnings in 2017.

And with the company having generated £81.8m in free cash flow in the first half of 2017 -- a 24% increase on last year, the outlook for future dividend growth is tempting. At this rate, it's set to generate more than double the cash needed to pay for its dividends, meaning there's plenty of funds left over for future expansion. Shares in National Express currently yield 3.6%, but with City analysts expecting dividend growth of around 10% this year, its prospective dividend yield is forecast to rise to 3.9% by the end of the year.

Although challenging market conditions in its UK bus division continue to be a drag on near-term growth, the company's other operations, rail and international coach, are performing well. The company earns roughly 80% of profits from abroad now, meaning it's less exposed to the weaker UK transport sector than rivals Go-Ahead Group and Stagecoach Group -- which are both set to see shrinking underlying earnings over the next two years.

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Jack Tang has no position in any 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.

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