As the end of the tax year looms, many investors will be hunting for dividend shares to add to their Stocks and Shares ISA.
Three FTSE 100 passive income stocks stand out: M&G (LSE: MNG), Phoenix Group Holdings (LSE: PHNX), and Legal & General Group (LSE: LGEN).
They offer incredible passive income of around 9%. But are their yields too good to be true?
M&G shares pay massive income
Wealth manager M&G has a trailing yield of 9.88%, the highest on the FTSE 100. But it’s not the full story. When buying shares, capital is at risk. And the returns on M&G shres have been volatile.
The share price has dipped 7.76% over the past year. However, it has climbed an impressive 50% over five years.
Throw in that yield and long-term investors have doubled their money. But past performance figures are slippery things. Five years ago, the first pandemic lockdown was in full swing, and markets were in a slump. That flatters subsequent growth.
I hold M&G stock — in fact — I hold all three of these. They’re all in the financial sector, which puts them on the front line of today’s stock market volatility, which could hit assets under management and customer inflows.
That could impact profits and potentially the dividend. M&G also faces competition from lower-cost passive investment providers, which could erode its client base over time.
Phoenix stock may struggle to fly
Phoenix Group is close behind M&G with a trailing dividend yield of 9.46%. The life insurer has done well out of acquiring and managing closed books of business from financial services firms. However, it needs to keep chasing new business to keep the cash flowing and the dividend alive. It’s done well so far, but there are no guarantees.
The Phoenix share price climbed 4% over the last year, boosted by a strong set of 2024 results, with operating cash generation up 22% to £1.4bn. That should help support the dividend.
However, the shares are down 14% over five years, and the capital loss must be offset against the dividend income.
Legal & General has struggled to grow
It’s no coincidence that the final ultra-high yielder is also in the financial sector, asset manager and insurer Legal & General.
This is a mature and competitive sector, which has been squeezed by higher interest rates and volatile markets. While there has been profit growth, it’s hardly been spectacular.
Legal & General’s trailing yield of 8.76% is eye-catching but its shares have disappointed, falling 4% in the past year but up a modest 16% over five. With dividends, long-term investors are still doing nicely.
Earning per share have fallen in recent years, though, and this has bumped up the price-to-earnings ratio to a pricey 84 times. It’s the most expensive of the three.
Yet the board recently announced plans to buy back £500m of shares this year after a strong 2024. In total, it aims to return more than £5bn to shareholders within three years.
I think all three dividends look sustainable, but don’t expect them to grow much, especially given today’s economic worries.
I think any of them are worth considering for a well-balanced portfolio, but I wouldn’t suggest newbie investors buy all three because there’s a lot of crossover. I wouldn’t quite call them no-brainers. As ever, there are risks as well as rewards.
