The Motley Fool

A dirt-cheap 7.7%-yielding FTSE 100 dividend stock I’d buy for 2021

Image source: Getty Images

Interest rates have fallen to new lows during the pandemic. The bank I use for my current account — a big high street name — now offers 0.01% interest on its savings accounts. In other words, just-about-zero interest. In this environment, I’m relying more heavily than usual on dividend stocks for income.

Today I want to look at a FTSE 100 stock that offers a 2020 forecast yield of 7.7%. As I’ll explain, I think this payout should be sustainable. It’s also a share I’d like to buy.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Much better than banks

The company I’m going to look at today is Legal & General Group (LSE: LGEN). The pension and insurance group has been a big winner since the financial crisis. L&G has delivered a share price gain of 150% over the last 10 years.

By contrast, the FTSE 100 has only gained about 10% over the same period, while Lloyds Banking Group‘s share price has fallen by 45% since November 2010.

Legal & General shares have slumped this year, but this dividend stock has still performed well for shareholders over the last decade. I now need to decide if the company can maintain this record over the next few years.

Highly profitable

There have been big changes to the pension market in recent years, but Legal & General has adapted by becoming a big player in the bulk annuity market. Essentially companies sell their pension schemes to firms like Legal & General, who accept responsibility for all future pension payments.

L&G’s specialist skills and economies of scale mean this has become a profitable business that sits well alongside its life insurance and asset management businesses. All three require a mix of short and long-term investments that provide reliable cash flows. The group has used its size to expand into new areas such as property. This has helped to overcome the challenges caused by ultra-low interest rates.

The group’s success is reflected in its profitability. Legal & General’s return on equity has averaged almost 20% since 2014, which is well ahead of more traditional insurers like Aviva and Prudential.

Why I’d buy this dividend stock

Cash generation is key for a dividend stock. Big profits are not much use unless they’re supported by reliable cash flows. Fortunately, Legal & General has consistently scored well in this area in recent years.

In 2019, the group’s after-tax profit of £1,700m was almost exactly matched by cash released from its operations of £1,606m. This covered the £1,048m dividend comfortably.

2020 looks likely to be a more difficult year, but my sums suggest the dividend should still be covered by surplus cash. Therefore I’m confident Legal & General’s 7.7% dividend yield should be sustainable.

I see this firm as a reliable dividend stock that I could hold for many years. The main risk I can see is that something unforeseen will happen that will disrupt the group’s business model. This could be a financial market event or a regulatory change. I don’t think it’s likely, but it will always be a possibility.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Roland Head owns shares of Aviva. The Motley Fool UK has recommended Lloyds Banking Group and Prudential. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.