Is L&G the best dividend stock in the FTSE right now?
Most of the time, when a stock has a dividend yield which is significantly higher than the market average there’s a good chance the dividend is about to be cut or suspended. It happened recently to BHP Billiton and Rio Tinto, although perhaps that is understandable since both are highly cyclical companies. It can also happen to more defensive “blue chip” stocks, with Tesco being a good example. Like Tesco a few years ago, Legal & General (LON:L&G) is a relatively defensive company offering investors a very high yield (6.5% as I write). As a dividend-focused investor my interest is certainly peaked, but will L&G just turn out to be another Tesco?
Investors in L&G have been here before
This isn’t the first time L&G has offered investors an enticing dividend yield. The most recent and extreme example came during the financial crisis. As a financial company in a world undergoing a financial crisis, it’s not surprising that the company’s shares were clobbered. Between 2007 and 2009 the share price declined by more than 80% from almost 160p to less than 30p. For several weeks in early 2009 L&G’s shares offered a dividend yield of more than 20%, and no, that isn’t a typo.
But that spectacular yield didn’t last. A dividend cut of more than 30% was announced in March 2009 and so – at least in some respects – the market was right to have pushed the share price down. In retrospect though, the price decline was massively overdone.
The dividend was only reduced to around 4p, and so a sub-30p share price still made L&G one of the great bargains of the financial crisis. By 2015 the share price had rallied over 1,000% to almost 300p, so buying L&G with a double digit yield in 2009 turned out to be a very smart (or very lucky) thing to have done….
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