Down 19% in 6 months, this FTSE 100 share pays 9.5% a year!

This FTSE 100 stock has lagged behind the London market over six months, one year, and five years. But I gladly hold it for its juicy cash dividends.

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As a long-term value investor, I’m always seeking unloved, overlooked, and undervalued stocks. Right now, I see the UK’s elite FTSE 100 index as packed with ‘fallen angels’ in this category.

The FTSE 100’s glaring value

As I write, the Footsie stands at 7,377.77 points. This leaves it down 8.3% from its record high of 8,047.06, hit on 16 February. And the London market’s fall over the last eight months has pushed it deeper into value territory.

Currently, the UK’s main market index trades on a multiple of 10.9 times earnings, producing an earnings yield of 9.2% a year. This means that its dividend yield of 4% a year is covered a solid 2.3 times by historic earnings.

To me, this clearly indicates that the FTSE 100 is deeply undervalued, both in historical and geographical terms. Then again, there is even deeper value hiding inside certain companies within the index.

A Footsie bargain buy

My goal as co-manager of my family’s portfolio is to own great assets bought at fair prices. For me, the cheap shares of UK insurer and asset manager Legal & General Group (LSE: LGEN) definitely fall into this category.

That said, Mr Market seems to have taken the opposing view. Indeed, investors have driven down L&G’s share price close to its 52-week lows. As I write, the shares trade at 206.1p, valuing this business at £12.3bn.

Here’s how L&G stock has performed versus the FTSE 100 over four timescales:

PeriodFTSE 100L&G stockFTSE wins by
One month-3.2%-8.0%+4.9%
Six months-6.7%-19.1%+12.4%
One year+5.3%-11.3%+16.5%
Five years+6.4%-15.3%+21.7%

My table shows that over all four periods — from a month to five years — the Footsie has easily outperformed L&G shares. Also, this stock has lost almost a fifth of its value in half a year, which came as something of a shock to me.

For the record, my wife and I bought shares in Legal & General in July 2022, paying 246.7p per share. So far, we are nursing a paper loss of 16.5%. However, the above figures exclude cash dividends — the primary reason why we bought L&G stock.

L&G’s delicious dividends

Despite the unwelcome fall in the value of our L&G holding, I have high hopes for this Footsie firm. After all, this well-managed company has been around since 1836 — that’s 187 years and counting.

Also, this stock now looks so cheap that it seems a no-brainer bargain to me. It trades on a lowly forward multiple of 5.4 times earnings, producing a whopping earnings yield of 18.4%.

Even better, L&G’s market-thrashing dividend yield of 9.5% a year is covered a healthy 1.9 times by historic earnings. In other words, while this payout isn’t as ‘safe as houses’, it sure looks solid to me.

Summing up, owning this FTSE 100 stock since July 2022 has caused me and my wife some short-term pain. But I’m looking forward to plenty of long-term gain from L&G’s delicious dividends. That said, future dividends are not guaranteed, so they can be cut or cancelled at any time. But I see no signs of this outcome at present!

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.

Cliff D’Arcy has an economic interest in Legal & General Group shares. 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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