Could investors unlock £1,500 passive income instantly with these 3 FTSE Shares?
With FTSE shares looking relatively cheap versus international stocks, there are plenty of high-yield dividend opportunities for investors to capitalise on right now. Three of the largest include Legal & General (LSE:LGEN), Phoenix Group Holdings (LSE:PHNX), and M&G (LSE:MNG), which collectively have a payout of 7.9%.
That means an investor with roughly £19,000 to spare can instantly start earning a £1,500 passive income today. But does this investment actually make sense? And could this tempting yield actually be a trap?
Investigating dividends
While all three businesses have different specialisations, each operates within the financial services sector, particularly leaning towards insurance and investment products. Their ability to offer such high yields stems from strong cash flow generation driven by both internal and external factors.
Higher interest rates have ramped up demand for saving and retirement solutions like annuities, creating new growth opportunities for all three businesses. At the same time, each has been executing strategic optimisations to bolster profitability.
For example, Legal & General’s either disposing of or merging its non-core segments to streamline operations. Phoenix Group’s shifting its focus towards capital-light pension products. And M&G’s been aiming to grow its underlying operating profits by at least 5% a year through superior asset management.
These tactical shifts have already started delivering results. And now each company is boasting multi-year dividend hiking streaks. Needless to say, thatâs an encouraging sign for investors seeking a sustainable passive income.
| Company | Dividend Yield | Years of Continuous Dividend Hikes | Average Dividend Growth Rate |
| Legal & General | 8.4% | 4 | 4.1% |
| Phoenix Group Holdings | 7.8% | 9 | 2.9% |
| M&G | 7.5% | 5 | 11% |
What could go wrong?
Despite the strong financial position and impressive cash flow generation of these businesses, they are far from risk-free. Interest rate cuts by the Bank of England, while good for most companies, can be problematic for insurance-focused enterprises. After all, the lower the interest rate, the lower the demand for products like annuities.
At the same time, weak economic conditions create sector-specific operational risks.
Lack of growth can hamper investment performance, directly impacting M&Gâs asset management business. It can also cause the investment portfolios of insurance groups like Legal & General and Phoenix to underperform, creating a mismatch between older insurance premiums and future claim payouts. This is especially tricky for life insurance policies, which have a significant level of uncertainty regarding mortality and longevity.
Given the regulatory capital requirements, an unexpected downturn in local market conditions could create pressure on dividends. Even more so when factoring in the relatively high level of debt on the balance sheets of all three businesses, potentially opening the door to a payout cut. And typically, when dividends get cut, the share price follows.
Put simply, the impressive passive income being offered by these shares comes with notable risk. But given the potentially lucrative dividend opportunity, investors may want to consider taking a closer look.
The post Could investors unlock £1,500 passive income instantly with these 3 FTSE Shares? appeared first on The Motley Fool UK.
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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended M&g Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
