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2 big FTSE 100 dividend stocks I’d buy to beat the State Pension today

If you are looking for FTSE 100 income stocks that could help you beat the State Pension, I highly recommend taking a closer look at life insurer Phoenix Group (LSE: PHNX).

Specialist business 

Phoenix is a relatively unique business. The company specialises in buying up old books of life insurance other companies no longer want.

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The group fills a gap in the market. Life insurance is a challenging business with strict rules and regulations, which means many companies want out. Phoenix is more than happy to take on this business because it can do so at much lower costs.

By specialising in managing old books of life insurance, the company has been able to streamline its processes and operate at a much lower cost than those selling to the firm.

For example, last year, the company bought up an old book life insurance policies from Standard Life Aberdeen. Initially, management expected to be able to achieve £720m in synergies from the deal. However, several months after the merger completed, Phoenix’s estimate of merger synergies jumped to £1.2bn. That’s thanks to changes to IT systems and combining the bolt-on book of business into the rest of Phoenix’s operations under one legal umbrella.

Earlier this year, management predicted that, as Phoenix runs down its books of life insurance, it will generate £3.8bn of cash between 2019 and 2023. Most of this money is earmarked to be returned to shareholders. On current forecasts, the stock will pay out a dividend yield of 6.2% in 2019 and 6.3% in 2020. Based on its cash generation forecasts, I expect the dividend to remain at this level for the foreseeable future.

Future income champion

Another company I think has a bright income outlook is M&G Plc (LSE: MNG). M&G has only been an independent business for two weeks, but analysts are already expecting big things from the enterprise.

M&G and Phoenix have a lot in common. They both have life insurance businesses, which are in the process of being run off. M&G also has an asset management division, which has much better profit margins.

City analysts believe the firm has the potential to yield as much as 8.2% for 2020, which will be its first full year as a listed company.

Only time will tell if the business will be able to hit these forecasts, but I’m not going to bet against M&G. According to management projections, the dividend yield of 8.2% will be covered 1.5 times cash generated from operations, that’s excluding any growth that emerges during the next 14 months or so.

In my opinion, growth is a free option here. The market seems to be valuing the business on what has happened rather than what could happen.

The stock is currently trading at a forward P/E of just 7.5, around half of the sector average, implying it could jump by as much as 100% if growth surpasses expectations. In the meantime, investors have that market-beating dividend yield to look forward to.

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Rupert Hargreaves owns shares in M&G Plc and Standard Life Aberdeen. 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.