Even with the FTSE 100 enjoying a strong rally in 2025, the overall consensus from experts is that the UK stocks are still dirt-cheap. And that means there are some chunky passive income opportunities for dividend investors to explore.
Two discounted stocks that the analyst team at Berenberg Bank have highlighted are Legal & General (LSE:LGEN) and M&G (LSE:MNG), with yields of 8.6% and 6.8%, respectively. And £20,000 invested evenly across the duo would instantly unlock a £1,540 passive income today.
So, should income investors rush to buy?
The bull case
Legal & General is one of the UK’s largest financial services groups, offering retirement, asset management, and insurance solutions.
M&G offers a similar suite of financial products. And as such, both companies follow a business model of collecting premiums and managing large asset pools to generate profitable returns.
This also means that the financial duo benefits from similar tailwinds and catalysts. And one of the largest growth drivers right now is the rebound in the bulk purchase annuity (BPA) market as companies across the UK seek to de-risk their defined benefit pension schemes.
At the same time, steady interest rate cuts from the Bank of England are also creating a favourable tailwind for both firms’ investment portfolios, lifting asset values of both bonds and stocks.
The combined result? Both management teams have highlighted their ambitions to not only maintain shareholder payouts but expand them over time.
In other words, even with some of the highest yields in the FTSE 100, both Legal & General and M&G could be on track to generate even more income for shareholders in the coming years. That certainly sounds exciting… but what’s the catch?
The bear case
There are a lot of powerful tailwinds supporting both businesses. But like any investment, success is not guaranteed, especially with multiple challenges emerging for these firms.
The BPA opportunity is huge. But with so much potential profit on the table, seemingly every insurance group is trying to cash in, creating enormous levels of competition.
With lots of rivals bidding to buy the same pension schemes from businesses looking to de-risk, undercutting activity is already rampant, resulting in lower long-term profit margins from these transactions.
At the same time, the pricing of insurance premiums is also under pressure due to strained household budgets as well as rising unemployment.
This combination of headwinds points towards a longer-term slowdown in both revenue and profits that could eventually cause dividend growth to stagnate, or in the worst case scenario, reverse.
What’s the verdict?
Berenberg has issued a share price target of 308p for Legal & General and 342p for M&G. Compared to where these stocks trade today, that signals that a potential 14% to 20% discount is on the table for these seemingly cheap stocks.
However, the shares could be trading at a discount for a reason.
With uncertainty surrounding future revenue growth and profit margins creeping in, today’s high yields are seemingly a reflection of longer-term risk – something that investors need to consider carefully. And for my income portfolio, I think there are better opportunities to explore…
