The FTSE 100 contains some stunning dividend shares right now. It’s possible to generate a second income of close to 8% a year, taken entirely tax-free inside a Stocks and Shares ISA. That’s far more than a best-buy savings account. Returns on cash are shrinking again following last Thursday’s (18 December) interest rate cut.
Dividends aren’t guaranteed, of course, and neither are share prices. But does the ultra-high income justify the added risk? In my view, yes. Done properly.
Here, I’m highlighting the three highest-yielding FTSE 100 stocks. But I wouldn’t suggest a new investor built an ISA income portfolio around just these.
A properly balanced portfolio
Diversification’s crucial. Money should be spread across different stocks and sectors with varying risk profiles, blending income with the potential for share price growth. That way, if one holding stumbles, others can help compensate.
The reason for caution here is simple. The FTSE 100’s three biggest yielders all come from the same sector: financial services.
They’re insurer and asset manager Legal & General Group, the index’s top yielder at 8.42%, Insurer Phoenix Group Holdings, yielding 7.52%, and wealth manager M&G (LSE: MNG), with 7.2%.
Now for a confession. I own all three. However, they sit within a broader portfolio of 15 FTSE 100 and FTSE 250 stocks, which feels reasonable.
When I bought them in 2023, traditional UK financials were deeply unloved as investors piled into US mega-caps. Yields were nudging 10%, while base rates sat above 5%, making cash look deceptively attractive. My thinking was simple: when rates eventually fell, dividend shares like these would regain their appeal.
So far, that’s largely played out.
These stocks are also growing
M&G leads the pack, with its share price up 44% over the past year, closely followed by Phoenix on 43%. With dividends reinvested, my total 12-month return is around 50%, which is remarkable for supposedly staid stocks. Legal & General’s lagged, rising just 13%, but my total return is still above 20%. I’m hoping it can play catch-up.
M&G’s making slow but solid progress. In 2024, it reduced debt, simplified its structure, cut costs by £188m, lifted adjusted operating profit before tax by 5% to £837m, and generated £933m of capital. That said, momentum’s slowing. First-half 2025 results showed operating profit up just £3m to £378m, partly due to £8m of foreign exchange losses.
After such a strong run, I doubt M&G or Phoenix will repeat last year’s gains. Legal & General may have more scope to recover if earnings improve.
There are risks. All three would be vulnerable in a stock market crash, as falling asset values would hit assets under management. Competition’s also intensifying in the new growth area of bulk annuities.
Still together, they offer a combined trailing yield of 7.71%. Investing a full £20,000 ISA allowance would have generated £1,542 over the last year, tax free. They aim to increase dividends by a modest 2% a year, which would lift that to almost £1,573 in 2026.
I think all three are worth considering for long-term income and growth. But only as part of a properly balanced portfolio.
