I was running through a list of FTSE 100 dividend stocks and was pleasantly surprised to see three of my favourite portfolio holdings were right at the top of the yield chart.
Two of them pay income of more than 9% a year, one pays more than 10%. Across the three, my average yield is a stunning 9.82%.
That’s almost double the interest I’d get from a best-buy variable rate savings account, and stocks offer me two further advantages over cash.
I love ultra-high FTSE 100 income shares
First, I have the prospect of capital growth on top if their share prices rise, turbo-charging my overall return. Second, when interest rates start falling, which may finally happen in 2025, savings rates will fall but with luck, my dividends should keep rolling in at today’s levels.
The catch is that neither advantage is guaranteed. Share prices can rise as well as fall, so my capital is at risk. And if my stock picks don’t generate enough cash to fund their dividends, they could be cut too. Once yields head towards double digits, they become vulnerable.
My three ultra-high-yielders are Legal & General Group, which has a trailing yield of 9.29%, M&G, which yields 9.76% and Phoenix Group Holdings, which top them both by yielding 10.42%.
One thing instantly becomes clear. All three are in the financials sector and manage huge pots of assets on behalf of investors and policyholders. While M&G is a wealth manager, having been hived off from FTSE 100 insurer Prudential in October 2019, L&G and Phoenix are primarily insurers.
Strip out the ‘Magnificent Seven’ US tech mega-caps, and it’s been a bumpy few years for stock markets. The pandemic, energy shock, cost-of-living crisis and Chinese slump have smashed confidence. All three of these stocks have struggled, as my table shows.
| Legal & General | M&G | Phoenix Group | |
| 1-year stock return | -2.64% | -1.18% | 6.01% |
| 5-year stock return | -20.26% | -13.07% | -28.67% |
Since I bought them roughly 18 months ago, I’ve avoided the worst of the share price dips. I’m roughly around 10% ahead, once I add in my dividends.
I’m holding all three for the long term
Investment manager M&G conforms to the pattern. Pre-tax operating profits fell 3.8% in the year to 30 June to £375m, as net outflows hit £1.5bn amid disappointing markets. Operating capital generation slipped from £505m to £486m.
Worryingly, dividend cover has slumped to just 0.6. Ideally, I want to see dividend covered twice by earnings. So there’s a risk the board could cut shareholder payouts. Yet it wants to avoid that if it possibly can, and luckily maintains a healthy balance sheet and can raid its capital reserves to plug any shortfall.
Its Solvency II capital ratio was 210% as of June, more than double the regulatory requirement of 100%. The board has also upgraded its three-year cash generation target from £2.5bn to £2.7bn.
CEO Andrea Rossi has upped its cost-savings targets and says M&G is showing its resilience. I’m assuming that extends to the dividend.
At some point, possibly even next year, interest rates should fall and if they do, markets should pick up. I’ll continue to hold all three high-yield heroes with a minimum 10-year view and reinvest every dividend I get to buy more shares.
