In my view, FTSE 100 dividend stocks are hugely underrated. Some offer ultra-high dividend yields of 7% or 8%, and may also deliver plenty of share price growth on top.
The higher the yield, the more income savers can generate from the same pot of money. And it will be tax-free for those who invest inside their Stocks and Shares ISA allowance.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Under the so-called 4% rule, which is popular in financial planning, if an investor withdraws that percentage 4% of their savings each year, their capital should broadly last for life.
Phoenix shares are flying
For someone targeting a £750 monthly income, which adds up to £9,000 a year, that would require an ISA pot of £225,000. But if they could generate an annual yield of 7% instead, the target pot plunges to around £128,600.
Now 7% is a very high rate of income, but it can be targeted by purchasing a spread of high yielding blue-chip stocks such as FTSE 100 insurer Phoenix Group Holdings (LSE: PHNX).
A couple of years ago Phoenix shares yielded about 10%, which is when I bought them. I simply couldn’t resist that level of income, even though I know high yields can be vulnerable, because companies have to generate a lot of cash to pay them.
At the time, Phoenix had delivered eight dividend increases in the previous 10 years, which showed me that the board was committed to rewarding shareholders when feasible.
Today the yield on Phoenix is around 7.98%, way above today’s average FTSE 100 yield of 3.25%. Better still, investors have enjoyed capital growth on top lately, with Phoenix shares up 35% over the past year. Throw in that yield and the total return tops 40%. Over two years the share price is up about 53%, lifting the total return nearer to 70%.
Share price growth on top
2024 results (published 7 March) show operating cash generation of £1.4bn, up 22%, helping support the dividend and reduce leverage.
In the first half of the 2025 financial year, Phoenix posted a healthy 25% rise in adjusted operating profits to £451m. It also has a Solvency II surplus of about £3.6bn and strong shareholder capital coverage ratio, which gives me greater confidence in the sustainability of the payout.
That said, risks remain. Phoenix operates in the mature and competitive UK life insurance and pension market, which means future growth may be limited. A wider stock market crash would hurt, while the slightest whiff of a dividend cut would hit the share price as well as the income.
I think Phoenix shares are still well worth considering, and investor should also think about checking out other supersized income stocks, such as M&G and Taylor Wimpey, assessing both the risks and the potential rewards.
Targeting a 7% average yield across an entire portfolio can be a bit tricky, as many growth-focused stocks can yield as little as 1% or 2%. And don’t expect to generate that income overnight. Investors should aim to build their wealth over time. FTSE 100 dividend income stocks are a brilliant way of doing that
