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.
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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!
