Last Thursday (7 November) the Bank of England committee decided to lower the base rate to 4.75%. With more cuts likely into 2025, I’m keen to take advantage of higher-yielding investment options, including FTSE 100 dividend shares. With some ideas paying over 10% right now, here’s where I could look to invest.
Top of the tree
Phoenix Group Holdings (LSE:PHNX) is currently the highest-yielding stock in the entire index at 10.87%. In fact, the dividend yield hasn’t fallen below 9% at all over the past year.
The business acquires and manages life insurance and pension funds. It also offers other retirement and saving add-ons to clients, making money through the fees and commissions charged. Given that this is quite a steady and stable operating model, it generates good cash flow. As a result, it’s able to pay out some of the earnings as dividends on a regular basis.
The dividend per share has been increasing year on year for a while now. Even during the pandemic payments continued, which gives me confidence that this could be a strong income stock even when the goings get tough.
Over the past year, the share price is up by 6%. This is another good sign in that the yield isn’t high simply due to the share price dropping rapidly.
One risk is the potential sharp moves in the coming year with interest rates. Phoenix Group invests heavily in the bond markets for retirement products. If interest rates fluctuate a lot in 2025, this could increase volatility in the bond market, providing some headaches for investors.
Struggling with demand
Another option yielding 10.2% is M&G (LSE:MNG). In contrast to Phoenix Group, the share price for the investment manager has fallen by 5% over the past year.
Part of the weakness in the share price has been driven by poor results. The half-year earnings from September showed net client outflows of £1.5bn, in contrast to the net inflows of £0.7bn from H1 2023. Client flows are a key metric for the company. If the business is attracting new money, this likely goes into funds or other products. As a result, it then generates fees for M&G. So the fact that money is being pulled out by clients is a bit of a red flag for future financial performance.
The business has been focusing on simplifying operations. It has also reduced debt by £461m over the past year, alongside other cost reduction measures. Even though this means that the dividend is unlikely to be cut any time soon, I’m a bit worried here.
If M&G can’t stem the outflow of money over the coming couple of years, revenue and profit are likely going to fall too. There’s only so far you can cut costs. Revenue needs to be pushed higher.
So although I’m not running for the hills right now, I think I’ll be staying away from investing in M&G. However, I do think Phoenix Group is in a strong position and so am considering investing.
