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I’d buy this FTSE 100 6% yielder but avoid this 8% yielder

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Legal & General Group (LSE: LGEN) has long been a great share for those seeking strong dividend growth year after year. Payouts at the FTSE 100 insurance colossus have jumped 65% over the past five years and City analysts are expecting them to keep on surging.

Despite a predicted 12% profits drop in 2018, Legal & General is still predicted to raise the dividend to 16.3p per share from 15.35p last year. This results in a giant 5.9% yield.

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And the dial moves to 6.2% for 2019 thanks to predictions of a 17.3p dividend, a forecast helped by an estimated 7% earnings recovery.

It isn’t hard to see why the number crunchers are so upbeat over Legal & General’s dividend outlook either. The company continues to sling out bags of cash and in 2017 its net release from continuing operations improved 9% year-on-year to £1.35bn. And this balance sheet strength should help payouts continue to rise even in the event of some earnings turbulence, as is expected in the current year.

And looking down the line, I am convinced Legal & General has what it takes to punch strong and sustained earnings growth as it builds scale. Total assets under management at its investment management division came within a whisker of the £1trn mark last year at £983.3bn.

In my opinion the Footsie company is far too good to be trading on a dirt-cheap forward P/E ratio of 10.6 times.

A riskier pick

Bonmarche Holdings (LSE: BON) is another London-quoted stock that could well attract serious attention from income investors.

In the year to March 2019, helped by an anticipated 21% earnings rise the value retailer is expected to lift the dividend to 7.4p per share from an estimated 7.2p reward for fiscal 2018, results for which are slated for June 19. This results in a gigantic 7.7% yield.

And supported by an expected 21% profits jump next year, the dividend is expected to leap again to 7.6p. This means the yield marches to an even-more-impressive 7.9%.

A mega-low forward P/E ratio of 6.4 times completes Bonmarche’s appeal as a brilliant stock on paper. But of course, real world investing involves more than looking at numbers, and for this reason I do not think the FTSE 250 company is a safe pick right now.

Bonmarche plummeted in January after it warned that conditions were becoming more difficult for the country’s clothes sellers. And while last week’s full-year statement came out with no fresh nasties, chief executive Helen Connolly did warn that “we expect the market to remain difficult.”

This comes as little surprise as retail sales indicators in the UK continue to disappoint, the latest batch of Office for National Statistics numbers showing a 0.5% drop in the three months to March and falling short of broker estimates.

Bonmarche may be cheap, but I for one believe the combination of crimped spending power in the UK, combined with the intense competitive pressures in the retail clothing sector, make the business an unsuitable pick for anyone without a high degree of risk-tolerance.

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Royston Wild 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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