8.1% dividend yield! Should I buy this dirt-cheap FTSE 100 stock?

Legal & General (LSE:LGEN) has one of the strongest dividend yields in the FTSE 100. With its share price falling in recent weeks, the financial services giant is now offering shareholders an 8.1% dividend yield.

But as we know, large dividend yields can be a warning sign. So should investors pile into L&G for these strong returns, or what else should they do?

Business is strong

Legal & General is not a declining stock or an underperforming business. The multinational financial services and asset management company posted operating profit of £2.52bn in the year to December 31, up 12% year-on-year, and beating consensus expectations of £2.46bn.

Retail operating profit rose 33% to £825m, but investment arm LGIM saw operating profit fall to £340m from £422m. The decline in operating profit at LGIM was offset by the impact of market movements on assets under management.

But the strong performance of the business in general led to a 5% increase in the full-year dividend.

High yield, low P/E

As noted, Legal & General offers one of the strongest dividend yields in the index. Coverage is also solid. The dividend coverage ratio (DCR) – a financial metric that measures how many times a company can pay dividends to shareholders – is 1.98.

In general, a coverage ratio of around two is considered healthy. Legal & General’s DCR indicates that it can pay its shareholders a dividend of almost twice its net income.

Legal & General also trades at a low price-to-earnings (P/E) ratio – 6.2. It’s about half the index average, and suggests either something is wrong, or it’s just a cheap stock. In this case, especially the latter.

However, it should be noted that companies with higher P/E ratios tend to trade at these levels because they offer greater growth potential.

Legal & General doesn’t offer much in the way of growth – although I’m buying more shares now because I like to buy on the dip. The thing is that the total annual return of the FTSE 100 is around 8-9%. Essentially, with its sizable yield, Legal & General offers most of its returns in the form of dividends.

Should I buy Legal & General?

Yes, I have bought more of this stock recently after the stock price went down. The market correction was caused by the failure of Silicon Valley Bank, no change in the macroeconomic environment or business performance.

Personally, I like fixed, dividend paying stocks as a core part of my portfolio. And there are some that remain like Legal & General. The dividend is safe with strong coverage, and I expect some upward movement in the share price from this artificial point.

Of course, nothing is guaranteed – not even this dividend – and I appreciate that challenging bond market conditions can pose risks. However, for me, Legal & General is a very good company and I am happy to have a portfolio.