There’s a fair-sized crop of UK dividend stocks offering almighty yields these days. In fact, if I were to stick just over 10 grand into this select trio of them, I could bag a £1k yearly passive income stream.
Legal & General
The first stock I’d go for is Legal & General (LSE: LGEN). Its lip-smacking 9.4% forward yield makes it one of the FTSE 100‘s highest.
Perhaps unsurprisingly then, Legal & General was the favourite stock among Fidelity ISA investors in August as they fled richly-valued technology shares. It was the most popular stock among SIPP investors too.
With its cheap valuation and massive yield, it’s easy to see why. Plus, the insurer’s balance sheet is in excellent shape and it’s committed to continue increasing future dividends.
A recession is a risk for the firm, as is a continuation of inflation and high interest rates. In the longer term though, I see a steadily ageing population benefiting Legal & General, given its expertise in pensions.
M&G
Next up is savings and investments provider M&G (LSE: MNG). It’s carrying a mammoth 9.6% forecast yield for this year.
The asset manager was spun off from Prudential in 2019 when the insurer went all-in on Asia. The share price has gone nowhere over this time while the dividends have increased — a recipe for a high yield.
Yet M&G has been doing fine. In 2023, adjusted operating profit before tax rose 27.5% to £797m. In the first half of 2024, it fell 4% to £375m, but this was higher than analysts’ consensus forecast of £355m.
One risk to bear in mind is the rise of passive investing, which could hamper the active fund manager’s long-term growth. Also, significant market volatility can hit its revenue, performance, and client base.
Reassuringly though, long-term fund performance has been excellent. As of June, 62% of its mutual funds ranked in the upper two performance quartiles over three years and 66% over five years.
Given the income bonanza on offer, I’d consider buying this stock if I were looking for ultra-high yields.
NextEnergy Solar Fund
Last but certainly not least, we have NextEnergy Solar Fund (LSE: NESF). This FTSE 250 renewable energy investment trust is sporting a mouthwatering 10.5% forward yield!
The fund has a portfolio of 103 solar assets across the UK and Italy, enough to power the equivalent of 301,000 homes for 12 months. Last year, it increased the dividend by 11% to 8.35p per share.
However, the market is worried about the firm’s debt levels. At the end of March, this stood at £338m. In a high rate environment, this adds risk to the dividend’s sustainability.
To improve its balance sheet, it has sold off a couple of assets at a premium to their holding values. That’s encouraging, but I’d say this is the riskiest of the three.
Turning £10k into passive income
No dividend is assured, just as individual share prices don’t always rise. But by building a well-rounded income portfolio, starting with these three ultra-high yielders, I could offset the risk of any single cut.
The average yield for this trio is a huge 9.83%. This means a £10,175 investment would generate £1k in passive income per year. And I’d still have almost 50% of my £20k ISA allowance left to buy other shares!
