The FTSE 100 is packed full of high-yielding dividend stocks right now. The main reason for this is that share prices — largely excluding resource stocks — have been pushed downwards this year. And when share prices decline, dividend yields rise.
But I want to see more than just a sizeable dividend yield. When looking for dividend stocks, I look for companies with solid records of rewarding customers. I also want to know that the dividend is sustainable — a big yield can be a danger sign.
So let’s take a look at why I’d buy 760 shares in Legal & General (LSE:LGEN).
The dividend
Legal & General offers a sizeable dividend of 7%. That’s some way above the index average and certainly a handy boost to my portfolio’s passive income generation. As such, 760 shares at around £2,000 would provide me with £140 a year.
And, as recently highlighted by Bank of America, the Legal & General dividend looks secure. One way we can assess this is by looking at the dividend coverage ratio — a metric that indicates how many times a company can pay its dividend from net income.
In 2021, the coverage ratio was 1.85. That’s solid enough. Above two is very healthy, while anything below one is a huge cause for concern.
Fundamentals
Legal & General has some pretty attractive fundamentals. The stock trades with a price-to-earnings (P/E) ratio of 7.5 versus a sector average of 11.4. It also has a forward price-to-sales ratio of 0.54 versus a sector average of 2.75 — however, this difference to the sector average also highlights the impact of debt on the balance sheet.
Looking at enterprise value-to-EBITDA (EV / EBITDA), the company (13.4) is more closely aligned with the sector median (12.6). So perhaps the stock isn’t quite as cheap as the P/E ratio suggests.
Outperforming
Having suffered in late summer, and during Liz Truss’s premiership, Legal & General is currently outperforming the market — up 13% over the past month.
Last week, L&G reiterated its full-year guidance with operating profit growth in line with the 8% it delivered in the first half, and capital generation of £1.8bn.
And there are further signs that in the current macroeconomic environment, the business should perform well. For one, in a high interest rate environment, it has to set aside less capital now to make future pension payments. “We are beneficiaries of rates rising across the world,” CEO Nigel Wilson said in a recent statement.
Looking to the future, there are more positive signs. An ageing global population means pensions need to last longer — it’s estimated that the global pensions market is worth an eye-watering $57trn.
One area that has developed in recent years is pension risk transfer (PRT) and companies are increasingly turning to Legal & General to manage their defined benefit (DB) pension plans. London is the world’s biggest PRT market, but insurers only manage 13% of these liabilities. I think there’s room to grow here.
I have some short-term concerns, mainly that a sizeable economic slowdown will likely reduce general demand for financial services. But, on the whole and in the long run, I’m positive on L&G. I’ve recently bought the stock, and I’d buy more today.
