The Motley Fool

FTSE 100 shares: this could be the best dividend stock to buy now

Image source: Getty Images

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.

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...

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.

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to get access to our presentation, and learn how to get the name of this 'double agent'!

Roland Head 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his 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 click below to discover how you can take advantage of this.