Dividend yields up to 9.5%! Which of these cheap British stocks should I buy?

A high dividend yield is a great way to maximise the returns on an investment. I’m considering the prospects of two firms that pay a decent dividend.

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Investing in stocks with high dividend yields is a great way to earn some extra income. Dividend-paying companies reward their shareholders by redistributing a percentage of profits to them each year. The higher the yield, the higher the payout. Reinvesting dividends can significantly boost investments via the miracle of compound returns. However, if the company doesn’t turn a profit, dividends can be cut. 

With two leading British companies now offering yields above 9%, I’m considering their potential benefits.

Phoenix Group Holdings

Phoenix Group (LSE:PHNX) is a life insurance provider with a 9.5% dividend yield. It’s the third-highest dividend payer on the FTSE 100, below Vodafone (11.27%) and British American Tobacco (10.10%). With a £5.57bn market cap, it’s one of the largest life insurance firms in the UK. It has a long history of successful acquisitions, most recently Standard Life, ReAssure, and Sun Life.

While the dividend is attractive and the company looks solid, external factors must be accounted for. The company may need to cut dividends in the future if profits drop. One key factor that could cause this is lower interest rates, which can squeeze the profit margins of insurance firms. The UK economy is currently going through uncertain times, which could result in lower policy sales for Phoenix as budgets tighten. This could impact profitability and lead to a drop in share price.

But overall, the life insurance industry is relatively stable so I feel I can rely on the company to turn a profit and maintain the dividend. In times of economic uncertainty, life insurance typically remains profitable as it isn’t a cost most people would cut unless absolutely necessary. For that reason, I plan on buying Phoenix Group shares for my dividend portfolio this month.

M&G

M&G (LSE:MNG) is a FTSE 100 company that provides investment banking and brokerage services to UK citizens. Although it was listed on the London Stock Exchange (LSE) in 2017, it has operated in one form or another since 1901. The global asset management industry is expected to continue growing for the foreseeable future and with a strong brand and global reach, it’s well-positioned to benefit from this trend.

Its diverse portfolio of investment funds across various asset classes means it’s well protected against industry-specific challenges. In addition to its 9.48% yield, M&G features a progressive dividend policy, so investors can expect a growing income stream.

However, with a £4.98bn market cap and £297m in earnings, M&G’s price-to-earnings (P/E) ratio is 16.88. This is significantly higher than the industry average of 11, suggesting the shares are most likely overpriced. Although the share price is up 7.8% in the past year, it suffered a sharp 9% decline following the release of the company’s full-year earnings report on 21 March. Consensus earnings per share (EPS) estimates from independent analysts were reduced twice in the past three months, suggesting an unfavourable outlook for the firm.

With its performance closely tied to financial markets, economic downturns can significantly impact the profitability and share price of M&G. What’s more, the asset management industry is highly competitive and the recent rise in robo-advisors threatens its future prospects.

For those reasons, I wouldn’t consider buying M&G shares at this time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has positions in Vodafone Group Public. The Motley Fool UK has recommended British American Tobacco P.l.c., M&g Plc, 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.

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