When it comes to dividend stocks, the UK’s flagship index has plenty for investors to pick from. And looking across all projections for 2025, an estimated £83.6bn worth of shareholder payouts are expected to be delivered by FTSE 100 companies throughout the year – a 5% increase compared to 2024.
However, among these income-producing industry titans stand three businesses currently holding the crown for the highest dividend yields in the entire index.
- M&G (LSE:MNG) – 9.9% yield.
- Phoenix Group Holdings (LSE:PHNX) – 9.5% yield.
- Legal & General (LSE:LGEN) – 8.8% yield.
On an equal-weighted basis, this basket of insurance stocks offers an impressive 9.4% annual payout. What’s more, each firm has been hiking dividends for years – a pattern that forecasts anticipate will continue moving forward. So are these dividend stocks incredible income opportunities? Or is the high yield a warning of trouble ahead?
The life insurance industry’s booming
While all three businesses have their niches, there’s some overlap when it comes to offering financial products relating to pensions, such as annuities. And lately, the bulk-purchase annuity (BPA) market has been highly active.
Out of the three, Legal & General currently holds the largest portion of the market share in the world of BPAs, with M&G the smallest. Regardless, even M&G has benefitted from the rise in BPA demand driven by higher interest rates. As a quick crash course, a BPA allows the trustees of final-salary pension schemes to pass on the risk of meeting future payments to scheme members.
But it’s not just the institutional markets driving growth. Higher interest rates have also made retail annuities more popular, with Legal & General selling a record £2.1bn worth of these in 2024. Overall, M&G surpassed its 2024 guidance, while Phoenix Group holdings actually hiked its targets for 2026.
All things considered, business appears to be booming. And it’s how dividends have kept flowing even at near-double-digit yields. But if that’s true, why is this basket of stocks actually down over the last 12 months?
A double-edged sword
Higher interest rates are sparking lots of activity in the pension risk transfer segment. But that’s also taking business away from asset management firms, including these three companies.
With pension funds taking part in BPAs, money is subsequently getting pulled out of equities in the process. As such, client cash outflows for M&G and Phoenix Group have been growing, while Legal & General reported a drop in profits from its asset management arm.
In other words, these firms seem to be partially cannibalising their own businesses. This is only made worse by the fact that rising competition within the BPA space will likely impact the profitability of these deals, creating a new headwind.
Are these shares worth buying?
The situation at M&G, Phoenix Group, and Legal & General is complicated. However, this complexity seems to be keeping the share prices low and yields high.
On a forward price-to-earnings basis, none of these stocks are particularly expensive, trading at 8.0, 11.2, and 10.1 respectively. And given these inexpensive valuations, all three dividend stocks could be worthy of a closer look. After all, complicated financial statements could be hiding brilliant bargains in plain sight.
