One mega dividend FTSE 100 stock I'd buy alongside Legal & General Group plc
As of the end of December, the FTSE 100's average dividend yield had crept up to a very respectable 3.81%. But for income-hungry investors who prefer a larger bi-annual cheque from their holdings, one share to consider is miner Rio Tinto (LSE: RIO) and its current yield of 4.58%.
Now, investors who are still smarting from the 2015 crash in commodity prices may be nervous about investing in a miner, and they wouldn't be wrong to be cautious. But as opposed to smaller rivals who are still highly leveraged and exposed to a wide variety of minerals, Rio is a fairly conservative operation.
At the end of its latest reporting period in June, Rio's balance sheet was in fantastic health with net debt down 21% year-on-year to $7.5bn, or just 0.4 times full-year EBITDA. And after slimming down by divesting non-core assets, the group is now focused on only its highest-returning mines with iron ore alone accounting for nearly two-thirds of EBITDA in H1 2017.
As the price of iron ore has risen and the group has so far avoided attempts to recklessly grow the top line, as all miners did in the boom years of the commodity supercycle, the new management team has found itself with a veritable mountain of cash to return to shareholders. In H1 a full 75% of underlying earnings were returned to investors via a $2bn interim dividend and $1bn share buyback programme.
With the outlook for iron demand fairly rosy, income investors should be in good shape over the medium term with Rio Tinto. However, they will need to keep a close eye on management and ensure Rio doesn't follow the lead of other miners and over-invest in relatively low return assets if commodity prices continue to rise and shareholders begin once again clamouring for unsustainable levels of growth.
Profiting where others are fearful
A safer bet may be Legal & General (LSE: LGEN) and its whopping 5.28% dividend yield. The group is growing nicely by offering services ranging from insurance to investment management and general savings.
And as it consolidates its market-leading position in several key areas, profits have been growing ahead of revenue thanks to increasing benefits of scale. Indeed, in H1 2017, pre-tax profits rose 41% to £1.2bn as the group notched up a double-digit rise in assets under management, increased the gross premiums its insurance arm wrote by 6%, and its annuity division brought in a significant chunk of new business.
Success in all major divisions and a rising solvency ratio allowed management to increase interim dividend payouts from 4p to 4.3p with analysts pencilling in a 15.273p full year payout that would yield a hearty 5.5% at today's share price.
Looking ahead, there's good growth opportunities for dividends as the group targets increased growth in the US. With two business are long-established there and an increasing number of companies looking to sell their bulk pension liabilities to insurers, an area where Legal & General shines, the growth opportunities in the world's largest insurance market look impressive.
If management can successfully make Legal & General a big name in the US, domestic income investors will surely reap the rewards.
But it goes without saying that the insurance industry has its up and downs, just like miners do. With that in mind, I recommend more conservative income investors check out the Motley Fool's free report on five non-cyclical defensive firms also offering huge dividends to their investors.
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Ian Pierce 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.
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