The dividend yield is one of the most important metrics for income investors. It measures the annual dividend payment as a percentage of the current share price. This provides a direct indication of the income generated by holding a stock.
In a low-interest-rate world, high-yielding shares can be especially attractive. They offer the potential for regular cash flow that often outpaces what’s available from savings accounts or government bonds.
However, a very high yield can sometimes signal risk. As such, investors must consider the sustainability of these payouts alongside the headline numbers.
Three of the FTSE 100’s highest-yielding stocks — M&G (LSE:MNG), Legal & General, and Phoenix Group — are all in the financial sector. Each offers a compelling case for income seekers, albeit with caveats.
M&G
M&G currently boasts the highest yield on the index, with forward rates around 9%. Since its demerger from Prudential in 2019, M&G has prioritised a stable and attractive dividend. This has drawn in income-focused investors.
The company’s business spans asset management and insurance, providing some diversification, though it remains vulnerable to market volatility and fund outflows.
The dividend per share is forecast to grow modestly from 20.1p in 2024 to 21.98p by 2027. And the payout ratio’s expected to fall from 84% to around 74.5% as earnings recover. This isn’t the best cover ratio.
The forward price-to-earnings (P/E) ratio’s projected to decline, suggesting improved value, but the company’s history of volatile earnings and high payout ratios means investors should keep a close eye on coverage and cash generation.
Still, M&G’s commitment to dividends remains clear, and its forward cover looks set to improve.
Legal & General
Legal & General’s another stalwart for income investors. The forward yield currently sits around 8.7% and it has a long history of progressive payouts. The company’s diversified model — spanning insurance, asset management, and retirement products — provides multiple streams of cash flow to support its dividend.
The dividend per share is forecast to rise slowly, from 21.36p in 2024 to 22.59p by 2027, with the payout ratio sitting between 80% and 90%. That’s clearly very high.
However, Legal & General’s Solvency II ratio remains strong, providing reassurance that the dividend’s well-supported by capital reserves. The board’s signalled a slower pace of dividend growth in the coming years, but the yield remains among the highest on the FTSE 100.
Phoenix Group
Phoenix Group rounds out the trio. It offers a yield near 8.7%. The insurer dividend per share is projected to grow from 54p in 2024 to nearly 59p in 2027, though the payout ratio’s expected to remain very high — over 100% — reflecting the company’s willingness to prioritise shareholder returns even as earnings fluctuate. The yield’s expected to grow to 9.5% by 2027, based on current prices.
While Phoenix’s business model’s resilient, its high payout ratio and sensitivity to market conditions mean the dividend isn’t without risk, especially if investment returns come under pressure.
The bottom line
If an investor’s seeking passive income, these stocks are certainly worth considering. However, the dividends are by no means guaranteed and the payout ratios are very high. Personally, I’m focused more on growth-oriented companies at this moment in time and don’t expect to add the above to my portfolio.
