Why Legal & General Group plc is a top dividend stock for a starter portfolio

Updated: 
Legal & General

Choosing which stocks to buy is often the hardest part of starting a share portfolio. There are literally thousands to choose from. However, if I was starting a share portfolio today, here's two dividend stocks that I would definitely consider buying.

Legal & General Group

Established in 1836, Legal & General Group(LSE: LGEN) is a blue-chip financial services company that has stood the test of time. The group is one of the world's largest insurance and investment management companies, serving over 10m customers worldwide and managing around £900bn of its clients' money. There are several reasons why I believe Legal & General has strong starter stock appeal.

The first is the company's big dividend. Indeed, the insurer paid each shareholder 14.4p per share in cash dividends last year. That's a dividend yield of a generous 5.2% at the current share price. Try getting an interest rate of that size from your bank. While the company ran into some difficulties during the Global Financial Crisis and was forced to reduce its dividend payment, the payout has been increased for seven consecutive years since. City analysts forecast 6% dividend growth this year and next, meaning that shareholders could be sitting on a dividend yield of almost 6% by next year. Furthermore, unlike many other high dividend stocks, Legal & General's earnings appear to comfortably exceed the dividend payout, meaning that the company can afford to pay its dividend.

Adding further weight to the investment case is Legal & General Group's low valuation. With analysts expecting the company to generate earnings per share of 24.8p this year, the stock's forward P/E ratio is just 11.1. As a general rule, a P/E ratio below the 15 mark is considered to be cheap.

I own Legal & General shares in my personal portfolio, and I plan to keep holding the stock for the foreseeable future, given the sizeable dividends.

BAE Systems

Another stock that has excellent starter potential, in my view, is defence specialist BAE Systems(LSE: BA). Geopolitical uncertainty has become the new normal in recent years, and as a result, I believe demand for defence - both traditional and cyber - should remain robust going forward. Indeed, in September, the US Senate passed a military spending bill that topped $700bn, an amount greater than Donald Trump actually asked for.

Like Legal & General, BAE Systems also has dividend appeal. The company paid each shareholder 21.3p in cash dividends last year, a yield of 3.6% at the current share price. While growth of the dividend hasn't always been spectacular, the payout has risen for an amazing 13 years in a row now and analysts expect growth of around 3% this year and next.

With earnings of 43.3p expected this year, the stock's forward P/E ratio is 13.6, a valuation that looks very reasonable in my view. I also hold BAE Systems in my personal portfolio and I believe that the company has the potential to provide both capital growth and dividends over the long term.

Another five excellent starter stocks... for FREE! 

If you're looking for more 'starter' stock ideas, check out The Motley Fool report Five Shares to Retire On

The report lists five of the Fool's preferred FTSE 100 dividend stocks, and can be downloaded for FREE, with no obligation, simply by clicking here.

Edward Sheldon owns shares in Legal & General Group and BAE Systems. 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.


SPONSORED FINANCIAL CONTENT