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3 top FTSE 100 dividend stocks I’d buy for 2020

Roland Head
A bull outlined against a field

I don’t know what’s going to happen in 2020. But I do know that the stock market is starting to price in a more cautious view.

If you’re investing for value and income, this could be good news. I can see more buying opportunities in the FTSE 100 today than I have for a while. In this article, I’m going to highlight three big-cap dividend stocks I’d buy for 2020.

Supermarket sweep

My top pick in the supermarket sector is Tesco (LSE: TSCO). The shares started to look expensive in May, but the share price has since fallen by nearly 20%. I think the UK’s largest supermarket is starting to offer decent value for investors.

The latest trading update warned of a “subdued UK market“, but reported like-for-like growth of 0.8% in the UK and Ireland. This included a 3.1% like-for-like increase in sales by Booker, the wholesaler acquired by Tesco in 2018.

Net debt has  fallen to quite modest levels and cash generation remains good. Earnings are expected to rise by about 10% this year, and in 2020/21.

This puts the shares on a forecast price/earnings ratio of 12.7 for the current year, with a dividend yield of 3.8%.

Continued dividend growth next year is expected to lift the yield above 4%. It’s been a while since TSCO shares offered a 4% yield. I see this as a buy signal and remain a happy holder.

I’d buy before the split

Insurance and asset management group Prudential (LSE:  PRU) is planning to split itself in two. The group’s fast-growing Asian and US insurance business will be retained in Prudential plc.

The UK-focused M&G asset management division will form a new unit, M&GPrudential. Shareholders will receive shares in the new business in proportion to the number of PRU shares they own.

The stock now trades nearly 25% below the record highs seen in early 2018. In my view this could be a buying opportunity. Splitting the company into two smaller, more focused, businesses makes sense to me. This kind of split has quite a good track record of delivering shareholder value.

With PRU shares trading on less than 10 times forecast earnings and offering a dividend yield of 3.6%, I think this could be an excellent long-term buy, ahead of the split.

My next buy?

One stock I’ve followed closely since it hit problems in 2018 is Micro Focus International (LSE: MCRO).

This large IT company specialises in providing support and development services for companies with complex, legacy computer systems. Very often, it’s not practical to replace these ageing systems. Instead, they must be adapted and extended so that they can interface with more modern services, such as e-commerce websites.

Micro Focus has become a leading player by expanding through acquisition as well as organic growth. In 2019, the group is expected to report turnover of $3,444m and earnings of $2.21 per share.

Chairman Kevin Loosemore’s acquisition-led strategy has probably reached its limit, in my view. He now needs to show that the group can continue growing without regular deals.

But cash generation is good and a recent sell-off has left the shares looking affordable to me, on nine times forecast earnings with a 5.8% dividend yield. I think now could be a good time to buy. I may add the shares to my own portfolio over the coming months.

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Roland Head owns shares of Tesco. The Motley Fool UK has recommended Micro Focus, Prudential, and Tesco. 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.

Motley Fool UK 2019