These FTSE 100 stocks with 6% dividend yields are beaten down bargains

I think some of the best stocks to own in the FTSE 100 right now are Phoneix Group (LSE: PHNX) and Legal & General (LSE: LGEN). Both of these companies support dividend yields of more than 6%. They also seem to have fallen out of favour with the market recently. As such, they appear to be trading at highly discounted valuations. 

Undervalued FTSE 100 opportunity

I can see why investors have been avoiding Phoenix. The company is challenging to understand. It buys pension policies and then uses its economies of scale to push down prices and unlock cash. This drives a virtuous cycle. The corporation can use this cash to fund further acquisitions and pay a dividend to investors. 

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The business is challenging to understand because there are so many moving parts, which may make it unsuitable for some investors. Indeed, a significant increase in interest rates or a sudden stock market crash could have an impact on its pension portfolio. In this situation, management may have to re-evaluate the distribution to investors. 

Despite this risk, I think the FTSE 100 stock is an attractive investment for my portfolio. At the time of writing, the shares support a dividend yield of 7%. Meanwhile, the stock is selling at a price-to-earnings (P/E) multiple of just 7.4. These metrics look incredibly attractive in my eyes. That is why I would buy the shares. 

Market-beating dividend yield

Legal & General operates a similar but not identical business model to Phoenix. The company is one of the largest insurance groups in the UK, offering everything from general insurance to life insurance and pension management. 

Due to its size, the group has substantial economies of scale. It is also investing large sums for the long term. This gives me confidence that the company is an excellent buy-and-hold investment. Management is unlikely to do anything that may risk pension investors’ money. Therefore, the dividend could be more secure than other blue-chip stocks.

That being said, no dividend is ever guaranteed. A financial crisis could cause problems across the business, undoubtedly forcing management’s hand to restrict or eliminate the payout. Further, additional regulations and increasing costs could reduce the amount of cash available for distribution.

Despite these risks, I would buy the FTSE 100 stock for its 6.4% dividend yield. Not only does the company offer this market-beating dividend yield, but the stock is also trading at an attractive P/E ratio of 12.5. 

As the UK economy returns to growth, I believe the demand for insurance products will expand. This will only help Legal’s bottom line. Moreover, as the country’s population grows, I think the demand for pension products will steadily increase. As one of the largest pension providers in the country, Legal should achieve substantial growth off the back of this trend. 

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Rupert Hargreaves 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.

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