One FTSE 100 6% dividend stock I'd buy with AstraZeneca

With the FTSE 100 hitting new highs, finding cheap income stocks is getting more difficult. But I believe there are still some good buying opportunities in the blue-chip index for dividend investors.

I've chosen two firms which have consistently beaten the market over the last five years. In my view, both stocks are classic income buys -- high quality businesses that should deliver reliable dividends and capital growth for many years to come.

This market can only grow

I think I'm safe in suggesting that the global pharmaceutical market is certain to keep growing over the coming decades. In my view, FTSE 100 firm AstraZeneca (LSE: AZN) is one of the best long-term opportunities in this sector. Unlike some smaller firms, I think it has the scale and diversity needed to provide reliable profits over many years.

The Anglo-Swedish firm's focus on serious illnesses such as cancer, heart disease and respiratory problems should offer plenty of opportunities for growth. As my colleague Royston Wild noted earlier this year, two of the company's newer products, Farxiga and Brilinta, reached blockbuster status in 2017. This means annual sales of more than $1bn each.

Alongside this, annual sales in China rose by 15% to $2,955m last year, accounting for 13% of all sales. Further growth is expected this year as the group expands into the world's largest emerging market.

I'd be a buyer

Chief executive Pascal Soriot is targeting revenue growth from $23bn to $45bn by 2023. I'm not sure how successful Mr Soriot will be. But analysts expect the firm's earnings to return to growth in 2019, with a 17% increase to $3.96 per share.

This figure puts the shares on a 2019 forecast P/E of 18, with a prospective yield of 3.9%. I think this could seem cheap in a few years. For investors seeking a long-term income, I'd rate the shares as a buy.

More of the same, please

AstraZeneca's future growth does depend on the success of Mr Soriot's strategy. By contrast, insurance and investment firm Legal & General Group (LSE: LGEN) already has a proven strategy. Expansion into areas such as property investment and bulk annuities have paid off, and the firm's profits have doubled since 2013.

For income investors, the big attraction is that this business generates a lot of cash. Much of this is returned to shareholders, while the remainder supports steady growth. In 2017, operating profit rose by 32% to £2,055m, as return on equity climbed from 18.8% to 25.6%.

As a result of this growth, Legal & General's continuing businesses released £1,325m of surplus cash to the parent company, 9% more than in 2016. I estimate that about £917m of this cash was paid out to shareholders, giving the stock a trailing dividend yield of 5.5%.

Can this continue?

This rate of profit growth may not always be sustainable. It's worth noting that Legal & General shares now trade at 2.1 times their net asset value. This valuation is supported by the high profitability of the group's assets. But these profits could fall during an economic downturn.

Despite this risk, I think the scale and financial quality of this business makes it one of the best income buys in the financial sector. The stock now trades on 10 times forward earnings, with a prospective dividend yield of 5.9%. I'd be happy to keep buying at this level.

Buy-And-Hold Investing

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca. 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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