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Forget Barclays and its big yield! I think this 6%-yielding FTSE 100 stock could be a better buy

I’ve been bearish on the big London-listed banks for some time because they are so responsive to the fickle movements of the general economic cycle. Profits at banking giants such as Barclays have been high for several years, and I think that means the downside risk is huge.

The next down-leg in the economy could take the banks’ profits, dividends and share prices with it. Meanwhile, the upside potential for investor total returns looks capped, to my eyes, because of the way the stock market seems to be compressing valuations in anticipation of the next downturn.

A decent track record

I’d rather hunt for big dividend yields in the wider financial sector and not just among the banks. One promising candidate is Legal & General Group (LSE: LGEN) the FTSE 100 life assurance, investment management and general insurance provider.         

The company has a decent six-year record of generally rising normalised earnings per share, operating cash flow, and dividends. And at the recent share price close to 277p the stock scores well against traditional value indicators with the price-to-earnings ratio running around nine and the dividend yield just over 5.9%. Meanwhile, City analysts have pencilled in an advance in the dividend of almost 7% for 2019. Things seem to be ticking along nicely.

Today’s full-year results report reveals that operating profit rose 10% in 2018 compared to the year before and earnings per share lifted 7%. The directors expressed their optimism by pushing up the full-year dividend by 7%. They said in the report that the firm is well placed to grow further and take advantage of organic growth opportunities and bolt-on acquisition opportunities. The plan is to support the company’s strategy with ongoing investment in technology “in a measured way.”

A compelling strategy

Legal & General is active in the three main areas of investing and annuities, investment management, and insurance. And the strategy involves aligning the business with the six long-term growth drivers of ageing demographics, globalisation of asset markets, creating new real productive assets, reform of the welfare state, technological innovation, and providing “today’s capital.”

The directors go on to explain that the focus of the firm has led to it participating in “material, high growth markets” where the firm is a leader or where it can “leverage” its expertise to increase its market share. I must own up to having a niggle in my mind about the apparent cyclicality inherent in Legal & General’s business. But the directors asserted in the narrative that the structural drivers around which the company’s strategy is constructed “are largely unaffected by on-going political and economic uncertainty.” Indeed, they are“confident” Legal & General will continue its momentum into 2019.

The generous dividend yield and the directors’ bullish noises make the shares tempting to me, and I’d certainly rather buy the stock than I would Barclays.

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Kevin Godbold has no position in any share 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.