As my retirement edges closer, I’m building a portfolio of FTSE 100 dividend shares to pay me a passive income when I stop working.
I’m trying to strike a balance between stocks that give me a super-high yield today, and those with lower yields but higher share price growth prospects.
However, if I was retiring tomorrow and drawing my dividends from day one, I’d aim to max out my income with these two ultra-high yielders.
Aiming for income
The first is FTSE 100 insurance conglomerate Phoenix Group Holdings (LSE: PHNX). It currently offers the second-biggest forecast yield on the index, a quite stunning 10.4% a year. Only Vodafone Group beats it, but not for long. The telecoms giant will slash its shareholder payout in half next year.
Which begs the following question: will Phoenix follow suit? Double-digit yields rarely prove sustainable for long.
I bought Phoenix shares recently, and was confident the dividend would survive at current levels. Now I’m getting a little edgy, with shareholder payouts covered just 0.9 times by earnings. Traditionally, cover of two times is seen as ideal.
The Phoenix share price is down 25.89% over five years and 12.32% over one year. It’s also failed to participate in the recent FTSE 100 rally. It seems that investors share my misgivings, too.
However, Phoenix generated more than £2bn of cash in 2023, beating its £1.8bn target (which had itself been upgraded). Much of that came from newly generated business, too. Its capital-light pensions and savings business, and its retirement solutions arm, are both doing very nicely.
Phoenix also boasts a solid balance sheet and boosted its operating profits by 13% to £617m. It’s turning around 2022’s loss nicely.
The board hiked the final 2023 dividend by 2.5% to 26.65p per share, giving a total payout of 52.65p. It’s a brilliant income stream and worth the risk involved. I may be making a bad call here but so be it.
I’d take another chance and double down on the financial services sector by topping up another portfolio favourite, Legal & General Group (LSE: LGEN).
Getting ready to retire
This is another fantastic FTSE 100 high yielder, forecast to pay me income of 8.6%. Of course, that isn’t guaranteed — dividends never are. Cover is thin here, too, at just 1.2. Safer than Phoenix but not totally secure.
The Legal & General share price has also been disappointing. It’s down 9.59% over five years, and up just 6.24% over 12 months. Yet it’s the income I’m after here.
2023 was a tough year with operating profit of £1.67bn falling short of company-compiled forecasts of £1.75bn. Legal & General’s asset management arm was hit by outflows as stock markets struggled and customers sought higher, safer returns from cash and bonds.
Legal & General has been hit by the ‘higher for longer’ interest rate mantra, as has Phoenix. However, I’m calculating they will come into their own when rates are finally cut, at which point bond yields and savings rates will inevitably decline. Then these super-high yielders will look even more attractive.
Despite the risks, I still think they’re a brilliant way to generate the second income I’d need if I did stop working tomorrow.
