Passive income is a rare and precious thing: money that comes in without demanding constant effort and labour. 

It can flow in month after month, year after year, without the recipient having to actively work for it. In an ideal world, it will steadily increase over time, to combat inflation.

All that might sound too good to be true, but it’s possible to generate this by investing in FTSE 100 stocks that distribute regular dividends. 

The average yield on UK blue-chip stocks is currently around 3.6% annually, with some offering returns as high as 7%, 8%, or in a handful of cases, even more.

Even better, as businesses grow their profits, they tend to boost their dividend payouts, meaning that income stream could expand over time.

Investing in dividend stocks

There’s another advantage. By reinvesting every dividend, investors can steadily accumulate more shares. These shares generate more dividends, compounding returns in an ongoing cycle.

And if the company’s share price rises too the investor’s capital will appreciate, increasing their overall wealth.

Stock market investments carry risks, and there’s no guarantee of profits. However, by spreading my investments across 15 to 20 different firms, my relative winners should outweigh any laggards, with luck.

Wealth manager M&G (LSE: MNG) offers one of the highest trailing yields on the entire index at 9.4%. That’s way more than any savings account pays. Plus there’s prospective share price growth on top.

Naturally, investing in shares differs from holding cash. Dividends aren’t guaranteed. Capital is at risk. The M&G share price has dropped 7% over the past year and 10% over five years. That will have eaten into the dividends. 

A potential downside for M&G is that market volatility could hit the value of the assets it manages, while lower investor confidence could reduce fund inflows.

Another risk is that M&G funds are mostly actively managed, while in recent years investors have favoured trackers. This trend could continue, hitting demand.

Share price growth too

M&G shares could benefit if interest rates continue to slide, but there’s no certainty. I hold M&G myself. I think it’s well worth considering, especially for investors who favour income over growth.

I would suggest mixing it with lower-yielding stocks that have stronger growth potential. By adopting this balanced approach, it’s possible to target an average dividend yield of around 6% per year.

If an investor generated average annual capital growth of 5% on top, this would lift their overall total return to 11%.

If someone invested £2,000 today and left it to grow for 30 years, an 11% average annual return could increase their capital to roughly £45,785.

With a 6% yield, that would generate a passive income of £2,747 a year, which hopefully rises over time. Not bad from an initial £2k.

These numbers are estimates, but they illustrate how stock investments can provide a sustainable second income. 

The post How an investor could target a passive income of £2,747 a year from just £2k of savings! appeared first on The Twelfth Magpie.

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Harvey Jones has positions in M&g Plc. The Motley Fool UK has recommended M&g Plc. 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.

Legal & General (LSE: LGEN) shares have only given me a modest capital return since I started buying them in 2023. So why do I like them so much?

According to my online trading account, I’m up just 7.1%. Hardly spectacular. But when I factor in dividends, my total return jumps to 19.9%. That’s a far more satisfying number. And I think it’s only the start.

I started building my position in the FTSE 100 insurer and asset manager in April 2023, adding to it in July and August that year. My average entry price was 226p. At today’s 242p, my capital gain is fine, but it’s not exactly Rolls-Royce. In fairness, I never expected it to be.

This FTSE 100 stock offers more income than growth

However, I’ve also received three dividend payments, in September 2023, and June and September 2024. All of which I reinvested to buy more Legal & General shares.

That income has helped turned my initial £4,000 into £4,796, after charges. Not a bad return, given I’ve only been fully invested for 18 months. It’s not brilliant either, but this is just the beginning.

Another juicy dividend will hit my account on 5 June, and another should follow in early September. Given Legal & General’s current trailing yield of 8.8%, I estimate they’ll total around £352. That will lift my holding up to £5,148, even if the share price doesn’t rise at all. If it does, my stake will be worth even more.

Of course, the shares might fall. My capital’s at risk, and while dividends are attractive, they’re never guaranteed. The Legal & General share price is up 5% in the last year. Over five years it’s down 25%.

It’s showing signs of life at the moment, up almost 10% in the last month. Shares tend to be cyclical, and a combination of falling interest rates and declining bond yields could drive fresh demand for UK dividend-paying stocks. 

Especially with US growth shares looking expensive. As a services company, Legal & General may also escape the worst of Donald Trump’s trade wars. We’ll see. Defensive stocks like this could be coming back into fashion.

Today, the stock currently trades at 32 times earnings, more than double the FTSE 100 average price-to-earnings ratio of 15. That reflects some bumpiness in earnings, and it’s something to keep an eye on.

Some analysts think we could get a market crash, as Trumpian volatility kills Wall Street’s bull run. Legal & General has £1.2trn of assets under management, and they’ll plunge if that happens. That won’t help the share price. If sustained, it could imperil the dividend. Time will tell. Short-term market volatility is always a threat, but it’s the long run that matters.

Even when capital growth is unexciting, dividend stocks like Legal & General can generate serious wealth. The real rewards come after five, 10, or 20 years. That’s why I’m happy to sit back, collect my income, and let compounding do the work while making sure I understand my total return – including income – and not just share price growth.

The post My Legal & General shares have climbed just 7% — so how come I’m sitting on a 20% gain? appeared first on The Twelfth Magpie.

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Harvey Jones has positions in Legal & General Group Plc and Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. 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.

With interest rates starting to fall, building a second income through dividends looks more attractive than ever. 

Banks and building societies are slashing rates on deposits, following the third Bank of England base rate cut on 6 February. Two or three more rate cuts could follow this year, and if they do, cash returns will fall further. So will bonds yields. With luck, dividend income will continue to rise.

Many FTSE 100 stocks offer solid value and sky-high yields, making them ideal for investors seeking passive income.

Can Phoenix dividends keep rising?

Dividends aren’t guaranteed though. Companies need to generate cash to fund them. This makes important to focus on companies with strong fundamentals. That means looking at revenue growth, customer retention cash flow and debt levels to assess whether the dividend is sustainable in the long run. 

While a high yield is tempting, it’s important to ensure the company can continue to pay – and hopefully increase – it in the years ahead.

One standout dividend stock to consider is Phoenix Group Holdings (LSE: PHNX), which currently boasts the highest yield on the FTSE 100 at a staggering 10.21%. 

For an investor who puts a full £20,000 Stocks and Shares ISA into Phoenix shares, that translates into an annual income of £2,040. Or £170 per month. 

Even better, forecasts suggest the yield will rise to 10.5% this year and 10.8% next, potentially boosting that income further.

So by 2026 our investor could be getting income of £2,160 a year, or £180 a month. And more thereafter, if the dividend holds. Plus any share price growth on top.

Phoenix is a specialist in managing closed life insurance funds, meaning it buys up policies from other providers and runs them efficiently using its economies of scale. 

This generates steady cash flow, crucial for maintaining that dividend. The board remains confident about its sustainability, recently reiterating its commitment to long-term shareholder returns. 

As with any high-yield stock, risks remain. While buying up life insurance books has worked well so far, any misstep in integrating new assets could strain cash flow and threaten dividends. Plus it needs to keep finding new books to buy. While making a success of diversifying into other areas.

Falling interest rates won’t necessarily work in its favour. Lower returns on cash and bonds could hit its investment portfolios, impacting profitability.

The FTSE 100 offers capital growth too

As with any stock, even a £5bn blue-chip, capital is at risk. Phoenix shares climbed 5% in the past year but are down 35% over five years. Long-term holders have seen much of their dividend income wiped out by capital losses.

Its shares now look decent value today, trading at a price-to-earnings (P/E) ratio of around 15, roughly in line with the FTSE 100 average.

Recent momentum has been positive, with the stock up 7% in the last month as falling interest rates revive investor interest. With US markets looking expensive, UK dividend stocks like Phoenix are attracting more attention.

No investor should put all their ISA into one stock, no matter how attractive the yield. A diversified portfolio is essential to spreading risk. While Phoenix offers a high income, a broader mix of stocks can provide a balance between dividend yield and capital growth, offering investors the best of both worlds.

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Harvey Jones has positions in Phoenix Group Plc. 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.

My Taylor Wimpey (LSE: TW) shares have taken a beating, plunging 22% over the past year. Yet when I crunch the numbers, they still look like they’re worth considering to me. But are they?

A word of warning. I first bought shares in the FTSE 100 housebuilder in 2023. In that relatively short period, they’ve been highly volatile. At one point, I was sitting on a 40% paper gain. Now I’m down 5%.

Higher interest rates have hit buyer confidence and made mortgages more expensive, hitting demand. And that’s on top of long-term affordability issues, not to mention the slowing economy. Higher inflation’s driven up labour and material costs, further squeezing margins. It’s a lot to take on.

Is this FTSE 100 stock truly a bargain?

Like many of its rivals, Taylor Wimpey reported a drop in property completions last year. The board responded by offering incentives and discounts to buyers, again shrinking margins.

Yet the balance sheet remains strong. Taylor Wimpey boasts a robust land bank, low debt and a disciplined approach to managing costs. 

With a price-to-earnings ratio of 11.6 times, the stock looks cheap compared to its historical average and peers. That’s a key reason why I see an opportunity here.

The UK still faces a chronic housing shortage, supporting demand. The Bank of England’s expected to cut interest rates two or three times this year. If it does, mortgage costs could fall and buyers return, boosting sales volumes and profitability.

None of this is guaranteed. Markets expected six interest rate cuts last year. We got just two. Inflation remains sticky. Donald Trump’s tax cuts and trade tariffs could keep it that way.

In its trading update on 16 January, Taylor Wimpey said full-year UK completions were towards the upper end of its guidance range, with operating profit in line with expectations. We’ll know more when final results published on 27 February.

The group ended 2025 with a solid £2bn order book, representing 7,312 homes. However, the board also cautioned that Budget hikes to employer’s National Insurance and the Minimum Wage will push up costs from April.

A brilliant dividend yield

I haven’t mentioned the dividend yet. That’s a huge selling point. The forecast yield for 2025 is 8.5%. The board policy is to pay 7.5% of net assets each year, typically around £250m. 

I don’t expect rapid growth. Last February, the board lifted the dividend by a fraction of a penny, from 4.78p to 4.79p. Given the sky-high yield, it’s hard to complain.

Taylor Wimpey remains cash generative. It’s weathered previous downturns while maintaining attractive shareholder returns. But if things get really bad, it could be cut.

The 16 analysts offering one-year share price forecasts have produced a median target of just over 148p. If correct, that’s an increase of around 27% from today. Combined with that yield, this would give me a total return of 35%. Fingers crossed!

For now, Taylor Wimpey remains a well-managed business with long-term growth potential. While risks remain, particularly around interest rates and consumer sentiment, its valuation looks compelling. I won’t buy though as I already have a big stake. But I feel the shares are worth investors considering.

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Harvey Jones has positions in Taylor Wimpey Plc. 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.

The appeal of Vodafone (LSE: VOD) shares baffles me. I just don’t get it. Yet plenty do.

At The Motley Fool, we have complete freedom to name the shares we love and the ones we hate. We think debate and disagreement makes us better investors. Plenty of my fellow writers have admired Vodafone over the years. I admire their judgement, but I’m sorry, I still don’t get it.

I didn’t get it 10 years ago, when the Vodafone share price stood at 232p. And I didn’t get it five years ago, when it traded at 155p. Nor three years ago, by which time it had slipped to 137p.

And I certainly didn’t get the appeal 12 months ago, when the stock was down to 64p.

This FTSE 100 stock just drops and drops

Vodafone has just fallen and fallen. It’s been dropping for 25 years, since peaking at 502p in February 2000, at the height of the dot-com frenzy.

I’m staggered that it still has a market cap of £17bn. Or remains a FTSE 100 fixture. Or that somebody hasn’t cried ‘Enough is enough!’ then waded in and broken the business up.

Okay, I know why people like it. They’re captivated by the yield. Vodafone has paid investors a heap of dividends over the years. Last year, it was the highest yielder on the entire FTSE 100, paying income of 11%.

Don’t be misled. Shareholder payouts have been cut twice in six years. In May 2019, the board cut the dividend per share by 40%, from 15.07 euro cents to 9 euro cents. This followed a €7.6bn loss attributed to the sale of Vodafone India, and increased competition in markets like Italy and Spain.

From March, payouts will be halved to just 4.5 euro cents, as part of a broader strategy to streamline operations, reduce debt and invest in key areas such as 5G infrastructure. The dividend has been falling as fast as the shares.

It’s true that the forecast yield still looks pretty good at 5.65%. But only because the shares have fallen so far.

The dividend is crashing too!

Vodafone has spent the entire millennium working off the excesses of the dotcom boom. The latest CEO to give it a whirl, Margherita Della Valle, is driving through her own transition programme, cutting 11,000 jobs (12% of the workforce), offloading the underperforming Spanish and Italian businesses, and merging Vodafone’s mobile operations with Three UK. She’s also pushing Vodafone’s fast-growing B2B division. All this makes sense.

Vodafone remains one of the world’s biggest telecoms groups with €37bn of revenues in fiscal year 2024. It has more than 300m mobile customers and 27m fixed broadband customers. It’s a big deal. Yet size can be more of a burden than a blessing.

Newsflash! Suddenly its shares are rising. They’re up 7.5% in the last month to 69p. Maybe we’ve finally hit turning point.

I still won’t buy Vodafone shares. The board still has to devote too much of its energies to tidying up past mistakes. There are higher yields out there. More reliable ones too. Many of my fellow Fools will disagree. Let’s see who’s right this time.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Vodafone Group Public. 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.

Generating a reliable passive income stream in retirement is a goal for millions. In my view, one of the best ways to achieve this is through a Stocks and Shares ISA.

By selecting the right dividend stocks, it’s possible to build a portfolio capable of delivering an impressive £24,000 a year in tax-free second income. So how much would an investor need to put in to achieve that?

It depends on how much the portfolio yields. Let’s say we targeted 5%, a figure achievable through a carefully selected blend of FTSE 100 and FTSE 250 dividend stocks. That requires a total pot of £480,000.

Someone who built a balanced portfolio of shares with a lower average yield of say 4%, would need £600,000.

A retirement built on dividends

It’s possible to find blue-chips yielding as much as 8% or 9% a year, but I wouldn’t suggest putting an entire portfolio in them. Ultra-high yields can prove unsustainable in the longer run.

Right now, FTSE 100 supermarket J Sainsbury (LSE: SBRY) has a dividend yield of exactly 5%. That’s bang on the nose.

Its forecast to hit 5.2% this year, then 5.4% in 2026. That’s the beauty of a good dividend stock. The board will aim to increase shareholder payouts every year, as profits rise. Assuming profits do rise. No guarantees. On the FTSE 100, Persimmon, Rio Tinto and Vodafone have cut dividends in recent years.

As the UK’s second-largest grocer (after Tesco), Sainsbury’s benefits from consistent consumer demand and a strong market position. I remember eating its own-brand baked beans as far back as the 1970s. Supermarkets are seen as defensive stocks. People still need to eat in economic downturns.

That said, when people have less money in their pockets, they’ll still cut back on food. Plus Sainsbury’s now owns Argos, which has struggled lately, and faces intense competition from Amazon and others.

But with luck, Sainsbury’s investors should get share price growth. The Sainsbury’s price is up just 1.5% over the last year, but a more impressive 30% over five years. All dividends are on top. The total return could be closer to 60%.

Sainsbury’s is well worth considering for a diversified, dividend-focused ISA. But it shouldn’t be the only stock. Personally, I’d aim for 15 to 20 different shares.

Building a diversified portfolio

I’d also diversify across multiple industries. Sectors such as consumer staples, utilities and financials tend to provide reliable dividends. Unilever, National Grid and Legal & General are worth considering.

Reinvesting dividends, at least initially, could accelerate portfolio growth. So how long would it take to save £480,000?

Obviously, that depends on how much the investor pays in. Someone who is 30 years from retirement could hit that target by investing £400 a month. This assumes an average annual total return of 7% a year, with dividends reinvested, roughly in line with the long-term FTSE 100 average.

If they only had 20 years at their disposal, they’d have to up that contribution to £925 a month. No time to lose. To bag passive income, it pays to get active as soon as popssible.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Harvey Jones has positions in Legal & General Group Plc and Unilever. The Motley Fool UK has recommended Amazon, J Sainsbury Plc, National Grid Plc, Tesco Plc, Unilever, and Vodafone Group Public. 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.

I like to get a second opinion when buying UK shares, even an artificial one. So I called in AI chatbot ChatGPT.

I asked it to create a balanced retirement portfolio of five FTSE 100 stocks. I had to substitute two of my robot buddy’s choices, because I’ve covered both a lot lately. I’ve highlighted my stock substitutions below.

As my robot buddy said, “when it comes to building wealth over 50, a sensible strategy involves balancing growth potential with steady dividend income”. Who needs Warren Buffett when I’ve got blinding computer insights like?

My mechanoid mate started by tipping Legal & General Group, a stock I love and own. On being pressed, it switched to insurer Prudential (LSE: PRU), which I don’t.

Prudential has underperformed

Prudential has made a much-applauded transition from Europe to Asia, hoping to tap into the huge and growing Asian middle class. So far, it hasn’t paid off.

The Prudential share price has plunged 20% over one year and 50% over five. China’s economic troubles have hit investor appetite, while higher interest rates and market volatility squeeze insurers generally.

The shares look good value with a price-to-earnings (P/E) ratio of just 9.5 times. The yield is a disappointing 2.7%, way short of Legal & General’s 8%. ChatGPT was right to pick that first. I’d do the same.

One day Prudential could rally hard, but I’ve been saying that for a long time now.

I also asked ChatGPT to find a substitute for its next pick, pharmaceutical giant AstraZeneca. Unsurprisingly, it picked rival GSK.

GSK has been trailing AstraZeneca for years, but in my view looks better value today. It yields almost 4%, roughly double Astra’s income. And it’s incomparably cheaper, with a P/E of around nine times against AstraZeneca’s hefty P/E of 65 times.

I didn’t have any issues with ChatGPT’s third pick, consumer giant Unilever. “As the owner of household brands like Dove, Persil and Ben & Jerry’s, it enjoys steady demand regardless of economic cycles”, ChatGPT drooled.

The yield is modest at 3.1% but Unilever typically hikes shareholder payouts by 5% every year. The shares are up 18% in 12 months. It’s sprawling, ill-focused operations need banging into shape, but it still looks like a solid long-term buy and hold to me.

Investing for income and growth

I certainly can’t argue against AI’s final two picks – utility giant National Grid and cigarette maker British American Tobacco (except on moral grounds in the latter case).

As a regulated utility, National Grid enjoys predictable income streams, ChatGPT tells me, with an attractive 5.8% trailing yield. The shares look good value with a P/E below 12. My worry is that National Grid has to invest heavily in the energy transition. That’s driving up debt and could one day squeeze dividends.

British American Tobacco is under constant regulatory attack and operates in a declining market. Yet it boasts top brands like Dunhill, Lucky Strike and Vuse, while “pricing power and brand strength allows it to maintain high profit margins”, ChatGPT enthuses.

The trading yield is 7% with the shares up 40% in a year. It’s also cheap with a P/E below nine.

Any investor considering these stock should ensure they work well with existing holdings. They should also take a long-term view. Even over 50, there’s still a long way to go.

The post I asked ChatGPT to name the best 5 UK shares to build wealth over 50 – and here they are! appeared first on The Twelfth Magpie.

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Harvey Jones has positions in GSK, Legal & General Group Plc, and Unilever. The Motley Fool UK has recommended AstraZeneca Plc, British American Tobacco P.l.c., GSK, National Grid Plc, Prudential Plc, and Unilever. 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.

Legal & General (LGEN) shares have surged 8.25% as I write this on Friday (7 February), and I couldn’t be happier. I’ve been waiting a while for this moment. In fact, I was digging in for a much longer wait, so this is an early bonus.

At first, I thought the FTSE 100 insurer and asset manager had published a bumper set of full-year results, but those don’t land until 12 March. 

Instead, we got a blockbuster announcement: Legal & General is selling its US protection business to Japanese mutual insurer Meiji Yasuda for $2.3bn. In return, Meiji Yasuda will take a 5% stake in L&G.

Legal & General CEO António Simões called it a “transformative transaction” that brings both strategic and financial benefits. 

It’s top of the FTSE 100 leader board!

It’s certainly transformed the Legal & General share price. It’s been sluggish for years, falling 5% over 12 months and 25% over five years. That’s despite a well-received update in December outlining £5bn to £6bn in Solvency II capital generation between 2025 and 2027.

Back then, I wrote that “I love my Legal & General shares even more after today’s exciting update”. Now, my devotion is being reciprocated.

FTSE 100 financials have struggled with stock market volatility, UK economic concerns and high interest rates. The latter made cash and bonds more attractive, but investing is cyclical, and that’s changing. 

With the Bank of England cutting rates three times since August, and with more likely, cash and bond yields will fall. By contrast, Legal & General’s dividend yield still stands at a staggering 7.8%.

I’ve reinvested every dividend, building my stake more of the recovery. That happy day seems to be getting closer.

Under today’s deal, Meiji Yasuda will take over Legal & General’s US protection business and gain a 20% stake in its US Pension Risk Transfer (PRT) unit. Legal & General keeps 80% through reinsurance arrangements.

Legal & General plans to use £400m to fund US PRT reinsurance and – drum roll – pump a chunky £1bn into a new share buyback programme. That dwarfs the recent £200m one. The rest of the proceeds will be reinvested into the business, hopefully driving further growth.

I’m getting income as well as growth

Between 2025 and 2027, Legal & General expects to return around 40% of its market cap via dividends and buybacks. Given today’s £15bn cap, that’s £6bn. This should also ease concerns about dividend sustainability. High yields often signal trouble, but that doesn’t appear to be the case here.

One sticking point is valuation. The stock looks surprisingly expensive, trading at 32 times earnings. In August, Legal & General reported a 40% drop in half-year post-tax profit to £220m. Core operating profit edged up just £5m to £849m. It’s not firing on all cylinders yet. Maybe it never will.

Legal & General operates in a mature, competitive market at a tricky time for the global economy. Donald Trump’s trade tariffs threats and a potential UK recession risks add uncertainty. Buying today risks profit-takers pouncing.

I still see the long-term case strengthening. I bought L&G three times in 2023. My shares are up just 12.5% since then (most of that today), but my total return, including dividends, is closer to 25%.

No guarantees, of course. But if Legal & General delivers on its promises, today’s rally could be just the start.

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Harvey Jones has positions in Legal & General Group Plc. 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.

I’m a huge believer in the long-term power of FTSE 100 dividend income shares, but lately my faith has been shaken.

I’ve got two ultra-high yielders in my self-invested personal pension (SIPP), both of them in the financials sector. Both have given me plenty of income over the last 18 months, but share price growth? That’s been in short supply.

This may be about to change. No guarantees, but I’m seeing hopeful signs.

My dividend stocks have huge potential

The two stocks are insurer Legal & General Group and fund manager M&G (LSE: MNG). Both are down around 5% over the last 12 months. Over five years, they’re down 24% and 14%, respectively. Now they’re sparking into life.

I’ve been waiting for this moment. My theory is that when interest rates finally slide, ultra-high yield dividend stocks like these two will look even more attractive. 

Why? Because yields on safe haven asset classes such as cash and bonds will fall with interest rates, but dividends shouldn’t. This may encourage investors to take a little more risk with their capital, to grab that higher income. Legal & General currently has a trailing yield of 8.5%. M&G’s yield is even higher at 9.25%.

Cash and bonds will never compete with that. As the yield gap widens, more investors will be tempted to make the leap. That could drive up their share prices.

Yesterday (6 February), the Bank of England cut base rates for the third time since August, to 4.75%. Legal & General and M&G jumped around 2% in the aftermath. This continues a trend. Both are now up 7% in the last three months.

I’ll use M&G as my example (but could just have easily chosen Legal & General). I bought its shares in July, September, and November 2023, investing £6,000 in total. My average entry price was 199p. As I write, they trade at around 215p. My stake is up 8%. Or £480 in cash terms. And yes, I know, that isn’t exactly Nvidia. 

The FTSE 100 is back!

However… I’ve also received a staggering £791 worth of dividends. Already. My total return is 21%. My £6k is now worth £7,271.

Some won’t be impressed, but I am. I’m due two more dividends this year, in May and October. Rough maths suggest I’ll get around £500. That’ll push my total return towards 30%. In just over two years. If the shares rise further this year, that will be on top.

I plan to hold M&G stock for five, 10, 15 years… longer if I’m lucky. At today’s pace, my stake could pile up nicely.

None of this is guaranteed. Sky-high yields like this one can be vulnerable. Volatile markets and a slowing global economy could hit take their toll. A potential trade war adds another layer of threat. If M&G’s profits fall, shareholders payouts could be slashed.

And if inflation continues to prove sticky, interest rates could stay higher for longer. Along with yields on cash and bonds.

As a buy-and-hold investor, I can afford to overlook those short-term risks. Instead I can sit back and enjoy watching my capital and dividends grow. Roll on the next base rate cut.

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Harvey Jones has positions in Legal & General Group Plc, M&g Plc, and Nvidia. The Motley Fool UK has recommended M&g Plc and Nvidia. 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.

Buying cheap shares rather than expensive ones isn’t a foolproof strategy. Sometimes stocks are cheap for a jolly good reason. And they may remain cheap, for years. Or even get cheaper, as performance flounders and investors give up.

Yet I don’t think that applies to the following two FTSE 100 companies. Both look good value to me. They also offer reliable-looking dividend yields of more than 5%.

An investor who divided this year’s £20,000 Stocks and Shares ISA contribution limit equally between these two could secure income of more than £1,000 a year. And there’s a fair chance that will rise over time.

HSBC offers dividends and growth

Asia-focused bank HSBC (LSE: HSBA) has a trailing dividend yield of around 5.9% a year. It looks attractively valued too, with a price-to-earnings (P/E) ratio of just under nine. 

I’m surprised by that low P/E, given how well the shares have done. HSBC’s share price has climbed by 33% over the last year. Over five, it’s up 45%. 

The board’s also been proactive in returning capital to shareholders through share buybacks, spending a thumping $3bn a quarter.

In its Q3 results for 2024, HSBC reported a profit before tax of $8.5bn, up from $7.7bn the previous year. Revenue also increased from $16.2bn to $17bn.

Yet the board isn’t resting on its laurels. It’s now winding down its investment banking arm as CEO Michael Roberts shifts to a “more competitive, scalable, financing-led model”. It will also have a tight Asia focus.

HSBC faces being the meat in a superpower sandwich, as the US and China face off. It’s clearly chosen its side. That’s not the only risk. If interest rates fall, that could squeeze net interest margins. The transitional process brings execution risks.

Greater exposure to China isn’t a one-way bet either, given the country’s property crisis. Donald Trump’s trade war won’t help. Yet I still think HSBC is well worth considering both for income and growth, with a long-term view.

Investing £10k in HSBC shares at the current yield would provide an annual income of £590.

My second income growth pick, cigarette maker Imperial Brands (LSE: IMB), boasts a trailing yield of about 5.5%. So £10k in that would deliver income of £550. That’s total income of £1,140, which I’d expect to rise over time as profits grow (no guarantees though).

Imperial Brands has rocketed this year

Imperial Brands also looks good value, with a P/E ratio of around 9.3. That’s despite the company’s share price surging 47% over 12 months, although it was volatile before that. Investors can’t expect the share price to simply plough on.

In its full-year results for 2024, Imperial Brands reported a 4.5% increase in operating profit to £3.55bn. That was despite a slight decline in total revenue. 

Net revenue from next-generation products, including tobacco alternatives like vapes, grew by 26%. They now account for 8% of total revenue.

Cigarette stocks are inherently risky. Basically, companies are pushing a product that kills. They face constant regulatory pushback. Rising revenues from smokeless alternatives could trigger stiffer rules.

No investment is without risks. These two certainly aren’t. But their high income and growth prospects make both well worth considering. But only with a minimum five-year view. And ideally a lot longer than that.

The post 2 cheap shares to consider buying in a £20k ISA for income of £1,000 a year appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Imperial Brands Plc. 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.