The FTSE 100 is packed full of dividend shares that I’d love to buy today. But what if there was a limit on such transactions? That would be a huge blow, because I love buying income stocks. My portfolio is full of them.
Let’s say it’s happened and we were rationed to just one. I thought this would be a difficult choice, but in fact it turned out to be pretty easy.
My number-one favourite dividend stock in the whole wide world is insurer and asset manager Legal & General Group (LSE: LGEN), which I hold and would really hate to sell. The obvious attraction is that it offers an ultra-high income, that only gets higher every time the FTSE 100 dips (which it’s doing quite a lot at the moment).
My number one
The current yield is a thumping 9.3%, nicely covered twice by earnings. Better still, it looks set to be a rising income. The yield is forecast to hit 9.77% in 2023 and a whopping 10.3% in 2024.
Supersized dividend yields like this one can be vulnerable. I can’t rule out the possibility that profits or cash flows could falter and management will cut it to save cash. Yet I’m as confident as I can be that the L&G dividend will not only hold steady, but grow.
In its first-half results, published on 15 August, the board highlighted in bold an impressive “£947m capital generation with significant dividend headroom”. That’s fighting talk, if you ask me. Management put its money where its mouth is by hiking the interim dividend by 5% to 5.71p. It’s planning 5% increases to both the full-year 2023 and 2024 shareholder payouts.
L&G’s first-half operating profit fell slightly from £958m to £941m, as volatile stock markets took their toll. However, with a Solvency II coverage ratio (a measure of solvency) of 230%, and £9.2bn surplus, the board can afford to keep investors happy.
Taking my time
I bought L&G’s shares on two occasions over the summer, because I thought they looked too cheap to ignore. For a while I was up but following recent stock market volatility, I’m now in the red. The stock is down 18.06% over six months and 9.44% over the year. I did say I was buying for dividends, didn’t I?
These short-term losses don’t worry me. Since I hope to hold the stock for years, if not decades, it has plenty of time to bounce back. In fact, it makes me want to buy more shares at today’s lower price. L&G is dirt-cheap, trading at just 5.43 times earnings. That’s a bargain price for a potential double-digit yield, if you ask me.
I’m not expecting the L&G share price to recover at speed. Certainly not until we can be sure that interest rates have peaked. Investors are now getting generous yields from cash or bonds, without taking a punt on equities. The Israel-Hamas conflict is on everybody’s minds with no easy solution.
Yet when markets finally get their mojo back, L&G’s asset management business means it could recover at speed. In the meantime, I’ll keep reinvesting my dividends (while trying not to think about all the dividend shares I’m no longer allowed to buy).
