Dividend stock: I’d buy this passive income machine today

This FTSE 100 dividend stock looks like a bargain to me right now. I wouldn’t think twice about adding it to my income portfolio.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Close-up of British bank notes

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The outlook for the UK economy this year remains bleak. This is hampering a group of FTSE 100 stocks that are thought to be overexposed to Britain’s struggling economy. However, I think the long-term prospects for one dividend stock are being overlooked. Here’s why.

Underappreciated stock

The latest forecast from EY ITEM Club, a UK economic forecasting group, says a UK recession is likely to be deeper – but not longer – than previously expected. Then the economy is on course to grow again from the middle of 2023.

As a long-term investor, that doesn’t alarm me too much. Yet it seems financial services giant Legal & General (LSE: LGEN) has been marred by all this headline negativity. Despite the FTSE 100 rising 6% over the last year, L&G stock is down 7%.

Like domestic bank Lloyds, L&G has been lumped in with the wider UK economy. That’s understandable given its vast exposure to Britain’s economy with pensions and insurance. But that’s only part of the story.

LGIM, its investment management arm, is one of the largest in the world and the second-largest in Europe. It has assets under management of $1.6trn, as of June 2022. It is a major global investor, with an interest in the US, China, and Japan.

Additionally, half of L&G’s pension assets are international. In terms of insurance, it’s providing more coverage in the fast-growing Indian market. Plus, it’s expanding meaningfully into the US for the first time, where it has created a major life science and technology platform called Ancora L&G.

I expect this geographic expansion to offer growth opportunities in the years ahead. And as populations age in its key markets, its range of pension and annuity products are likely to be in high demand.

Massive yield

The company’s most recent H1 results, announced in August, were solid. It grew its operating profit, earnings, solvency ratio, and upped its dividend.

Source: Legal & General

Yet the stock still looks cheap, with a price-to-earnings (P/E) ratio of 7.5. And the dividend yield for 2023 is now a massive 8%.

Of course, this large yield may indicate the firm could cut its payout. However, the fact that the dividend is covered 1.8 times by earnings gives me confidence that it’s safe for now.

The firm has a decades-long track record of growing its dividend. It’s basically a dividend machine, ideal for generating passive income.

Risks

The size of L&G’s various operations and increasing global presence does open up various risks. We saw in 2021 how the Chinese property market experienced entered severe financial stress. Though not affected by this partcular black swan, it shows how the company could encounter something similar in an international market to which it’s exposed.

However, L&G’s vast experience and pedigree in assessing such risk and complexity gives me peace of mind. There were no defaults in its annuity portfolios during the first half of last year. And it received 100% of scheduled cashflows from its direct investments. This is an extremely well-run business.

The stock is 260p today, which is the same price it was at in 2018. I plan to add to my holding very soon.

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.

Ben McPoland has positions in Legal & General Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »