If I could only buy one FTSE 100 dividend stock for passive income, I’d choose this

I’m planning to invest in FTSE 100 shares to generate a healthy level of passive income in retirement. Here’s my number one stock pick.

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There are loads of top dividend stocks on the FTSE 100 that I’d buy to generate a passive income in retirement, but what if I could only choose one?

It’s a tough call to make as there are so many top income stocks out there. Right now, fund manager M&G and housebuilder Persimmon both yield more than 10%. Imperial Brands and Rio Tinto yield more than 9%. Abrdn and Phoenix Group Holdings pay more than 8% a year. These are incredible returns, at a time when a best-buy easy-access savings account pays just 0.65%.

I’d buy this FTSE 100 Legal eagle

If I could only pluck one dividend stock from the index, I would go for Legal & General Group (LSE: LGEN). The £14.55bn insurance giant isn’t the whizziest stock, but it’s a solid name, with a solid business, and pays a solid level of passive income.

Today, L&G yields 7.2% a year, with dividend cover of 1.3 times. The forecast dividend yield is even more promising at 7.9%, with cover of 1.8.

It’s a pretty reliable dividend too. Unlike FTSE 100-listed insurers Aviva and RSA, L&G maintained its dividends through the pandemic. Management also kept staff on and shunned furlough support.

It didn’t emerge completely unscathed. The group’s final 2020 dividend payment was held flat due to Covid, and management also cut its dividend growth target for the next five years. Yet today’s passive income level still looks enticing to me.

What isn’t so enticing is its growth potential. The Legal & General share price trades at similar levels to five years ago. There have been up and downs along the way, but few signs of a breakout. Yet I’m looking for passive income here, rather than active growth.

The L&G share price crashed on Friday, by 5.62%, compared to a drop of 3.48% across the FTSE 100 as a whole. Yet I reckon current fears could be a buying opportunity, and L&G’s valuation looks tempting to me. It currently trades at a relatively low forward valuation of 8.3 times earnings, well below the FTSE 100 average P/E of 14.3. Its price-to-sales ratio is 1.1. That’s hardly demanding.

This is a top passive income stock

Legal & General is widely diversified across a broad range of personal finance areas, selling everything from general insurance and protection to investment funds, pensions, equity release and bulk annuities. It’s also a direct investor in housing and commercial real estate.

Interestingly, it’s one of just a handful of companies that continue to sell annuities, which could now swing back into fashion as interest rates finally pick up. The group is also well capitalised, and has forecast operating margins of 18.5%, and return on capital of 10.6%. This should help keep that passive income sustainable.

I’m not getting carried away. Legal & General is one of those stodgy, boring stocks that investors overlook when markets are flying. That may be an advantage right now. One year ago, it reported a 2% dip in full-year operating profits to £2.4bn. We will find out how well the last year has gone when it reports on Wednesday.

Another risk is that lack of share price growth — and the worse-than-average fall last week that I mentioned above. If it fails to grow in price, its dividends may not be enough.

Either way, I’d buy it for passive income ahead of any other FTSE 100 stock today. Then hold it for years and years.

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.

Harvey Jones doesn't hold any of the shares mentioned in this article. The Motley Fool UK has recommended Imperial Brands. 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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