These 3 FTSE 100 bargain dividend stocks now offer whopping 6% yields

You can generate income of 6% or even up to 8%+ a year with these three FTSE 100 (INDEXFTSE: UKX) favourites, says Harvey Jones.

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It’s a thing of wonder that you can get income of 6% a year from some of the UK’s top blue-chip companies when interest rates are languishing at 0.75%. The following three FTSE 100 companies are all big, established operations too, although there are never any guarantees when investing in stocks and shares.

Direct route

Take Direct Line Insurance Group (LSE: DLG). Everybody recognises the motor and home insurer’s red telephone, and everybody knows what the company does. That hasn’t stopped its share price falling 13% in the last year, although paradoxically this makes it a tempting buy today.

Direct Line is well into bargain territory trading at just 10.7 times forecast earnings, when 15 times is generally seen as fair value. Better still, it offers a massive forecast yield of 8.4%, although cover is thin at 1.1. Such a dizzying yield is often a sign of a company in distress and the dividend can be vulnerable, but as Rupert Hargreaves points out, Direct Line has committed to returning almost all of its profits to shareholders.

Motor insurance is a competitive market and premiums have fallen over the last year, squeezing its profits. Earnings per share (EPS) are forecast to rise a meagre 1% this year and 3% next, but the combination of a massive yield and cheap share price is hard to resist.

Legal transaction

Asset manager and insurer Legal & General Group (LSE: LGEN) has also had a tough year, its stock down 10% in that time but it is even cheaper at just eight times earnings. The forecast yield is a heady 6.8% and generously covered 1.8 times by earnings.

L&G has been one of my favourite stocks for some time, and while pension freedom reforms hit annuity sales, it has compensated by energetically pursuing bulk annuity transfers. It recently completed a £4.4bn buy-in for the British Airways pension scheme, the largest ever UK bulk transaction covering nearly 22,000 pensioners, and is actively quoting on £20bn more, with £7bn in exclusive negotiations.

Legal & General looks a strong business with a broad stream of revenues across passive funds, pensions, annuities and protection, even if five consecutive years of EPS growth look set to end this year with a forecast 2% fall. It still tempts, though. One to buy in the next dip?

Iron men

I am impressed to see such juicy dividend bargains on the FTSE 100, and here’s another. Iron ore miner Rio Tinto (LSE: RIO) currently trades at a forward valuation of just 9.7 times earnings, while tempting investors with a forecast yield of 6%, covered 1.7 times.

The shadow hanging over the mining sector is a potential global slowdown, while President Trump’s trade war is squeezing China’s once voracious demand for metals. Chinese GDP growth slipped to 6.5% in Q3, down from 6.7%

That said, Rio’s low valuation gives you plenty of margin in case things do take a downturn, while its strong dividend should see you through until it recovers. However, I’m not quite as bullish as Ian Pierce, who reckons Rio Tinto could be the best dividend stock on the FTSE 100. Given the competition, that is quite something.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

harveyj 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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