My main investing focus is on income. As I’m looking for high-yield stocks for my Stocks and Shares ISA, I tend to focus on the larger companies in the UK market. My research suggests the 6%-yielding FTSE 100 share I’m looking at today could be the best dividend stock to buy right now.
The company in question is savings and investment firm Legal & General Group (LSE: LGEN), which has released its latest figures today.
Of course, this financial giant won’t be suitable for everyone and I wouldn’t abandon my diversified portfolio for a single stock. But if I were buying dividend shares for a new portfolio today, Legal & General would definitely be on my list.
Good results in a bad year
I expected last year’s stock market crash to hit Legal & General’s 2020 profits. But today’s results show the impact was fairly minimal. Although pre-tax profit fell 12% to £1,607m, this drop was mostly related to valuation changes on some of the group’s assets, not cash income.
Cash released from the group’s operations — a key measure for dividend support — was more stable and fell by just 3.6%, to £1,539m. This supported an unchanged dividend of 17.6p per share. That means this FTSE 100 share offers a dividend yield of 6.2% at current levels.
Legal & General’s strong cash generation is possible because this business is very profitable. The group’s return on equity was 17.3% last year, down from 20.4% in 2019. I think that’s a good outcome in such a difficult year.
What makes Legal & General special?
A decade of low interest rates has made life difficult for banks and savers wanting safe returns on their cash.
A 17% return on equity would be a dream come true for the UK’s big banks. So why is this FTSE 100 share doing so much better?
I think the answer lies in Legal & General’s large pension business. This provides large amounts of capital that must generate reliable returns over long periods. Low interest rates make this difficult using traditional pension fund assets, such as government bonds.
However, chief executive Nigel Wilson has used the stable funding provided by pension funds to diversify Legal & General’s investments into ‘real’ assets. These include housing, commercial property and renewable energy. The company calls this ‘Our City’.
These assets require large amounts of capital up front but tend to generate reliable returns over long periods. Legal & General’s large size means it can invest in this way, while staying diversified.
This FTSE 100 share looks great: what could go wrong?
I believe Legal & General’s size is one of the secrets of its success. But it could also be the biggest risk for investors. The group has more than £1trn of assets under management. Many of these are complex and difficult to value.
In reality, no one outside the business is every likely to have a full understanding of the quality and reliability of the company’s investments. Small valuation errors, or unexpected problems — like the pandemic — could trigger future losses.
I can’t be sure anything like this will happen. But Legal & General has been in business for nearly 200 years and has been a pretty consistent performer over the last decade.
With the stock trading on 10 times forecast earnings and yielding more than 6%, I’d be happy to buy this FTSE 100 share today.
