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Legal & General Group plc isn’t the only dividend stock I’d buy today and hold forever

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A 6% yield I’d trust

At the end of January, Legal & General Group (LSE: LGEN) was the third-largest holding in fund manager Neil Woodford’s flagship equity income fund. This week’s results from the insurance and asset management group suggest that these shares are one of Mr Woodford’s better picks.

Underlying operating profit rose by 12% to £1,616m, helped by a £332m boost from “mortality release”. In other words, life expectancy is increasing more slowly than expected, reducing the amount of cash required to fulfil pension obligations.

Why I’d invest

Legal & General was able to release a total of £1,352m of cash from its operations last year, comfortably covering a 7% increase in the dividend to 15.35p per share. That’s equivalent to a dividend yield of about 5.8%.

Analysts expect adjusted earnings to rise by 7% to 24.7p per share this year, while the dividend is expected to climb 6% to 16.2p per share. These projects give the stock a forecast P/E of 10.7 and a prospective yield of 6.1%. In my view, this remains a compelling buy.

More opportunities than expected

Legal & General is finding profitable investment opportunities in the property market. So too is infrastructure investment specialist John Laing Group (LSE: JLG).

The company invests in projects such as wind farms, motorways, tunnels and waste treatment works. These require upfront cash before generating an income and — eventually — being sold.

Much of the firm’s new growth is taking place outside the UK, in the USA and Asia Pacific regions. Last year saw John Laing’s pipeline of opportunities grow much more quickly than expected. This resulted in the firm making new commitments totalling £383m, nearly twice the £200m originally budgeted for.

To help fund these without excessive borrowing, the company announced plans for a £210m rights issue of new shares today. Shareholders will be able to buy one new share at 177p for every three shares they own.

This cash will be used to help fund the £383m of investment commitments made by the group in 2017. The balance of the new investments will be funded by cash from asset sales, which totalled £289m in 2017.

This could be good news

When a company holds a rights issue, it’s often a sign of financial distress. That’s not the case here. Today’s figures showed that the group’s assets under management rose by 12% to £1,472.3m last year, while year-end recourse net debt was just £28m.

Shareholders will receive a total dividend for 2017 of 10.61p per share, a 30% increase from 2016.

My calculations suggest that after the rights issue, the shares will have an initial net asset value of around 277p. That’s consistent with the group’s share price, which has fallen around 4% today to 265p.

Investors will need to trust management not to overpay or be indiscriminate when investing in new projects. But progress so far has been good. With the stock trading in line with my estimate of book value and offering a yield of about 3.6%, I think this could be a good buy-and-forget income investment.

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Roland Head 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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