When I look for dividend shares to buy, should I just go for the biggest yields?

The FTSE 100 is having a strong year in 2024 so far. But there are still some great yields offered by our top dividend shares.

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I invest mostly in UK dividend shares. And as well as the dividend yield, I also look for good cover by earnings and evidence of long-term cash flow, among other measures.

But what if I just put some money into the ones with the biggest yields each year, and then simply forget about them?

It would sure make my head-scratching over my Stocks and Shares ISA choices a bit easier.

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Biggest yields

The following table shows the five FTSE 100 stocks with the biggest forecast yields at the moment. I’ve left out Vodafone, as it’s announced a big cut for 2025.

StockRecent
share price
Dividend
yield (cur)
Dividend
yield (next)
Phoenix Group
Holdings
514p10.2%10.5%
M&G204p9.8%10.1%
Legal & General
Group (LSE: LGEN)
223p9.2%9.5%
British American
Tobacco
2,669p8.8%9.2%
Aviva471p7.3%8.0%
(Sources: Yahoo, MarketScreener)

There’s one immediate take from this. Buying all five would put me very heavily into the overlapping insurance and asset management businesses, covering four out of the five.

British American Tobacco is the only non-finance pick in the whole lot.

And one thing I’ve always seen as a key part of my strategy is diversification. I was very glad of it in the banking crash, for sure. And I’ll want some decent diversification in case we see an insurance sector downturn in the future.

Cyclical pick

Saying that, I do like the sector. And I think Legal & General is the one that attracts me the most of these candidates.

Created with Highcharts 11.4.3Legal & General Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Insurance can be very cyclical. And when things are going well, dividend yields like those in the table can look their best.

Still, forecasts show the Legal & General dividend rising even further than that 9.5%, reaching 9.7% in 2026. That will, though, depend a lot on how the economy goes in the next few years. And right now, the world does not look like a very friendly place.

Fine so far

For now, at least, the cash flow seems to be going fine. At H1 time, Legal & General raised its interim dividend by 5%. And it’s progressing with “a £200m share buyback, consistent with our new capital return framework“.

The firm plans to keep lifting the dividend in the next few years, though with modest rises.

The main risk I see is that cyclical nature of the industry, coupled with a very real amount of competition. Like, from most of the others in my table.

Something different

Much of this thinking applies to the others in the table, except for British American Tobacco. That big 8.8% dividend comes even with the share price up 16% year-to-date.

Created with Highcharts 11.4.3British American Tobacco P.l.c. PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

I don’t share the fear that tobacco profits will disappear, at least not in my investing lifetime. But that’s the main risk, for sure.

It’s really just ethical issues that would keep me from buying tobacco shares. But other than that, this is a dividend that I’d love to snap up for some long-term income.

And it’s nice to see that not all the top five are in the same business.

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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.

Alan Oscroft has positions in Aviva Plc. 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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