7.5%+ yields! 3 cheap stocks with big British dividends

Even with the FTSE 100 reaching record highs in 2025, there are still plenty of cheap stocks for investors to capitalise on. And three of the cheapest when looking at the forward price-to-earnings ratio also happen to have the largest dividend yields in the UK’s flagship index.

I’m talking about Legal & General (LSE:LGEN), M&G (LSE:MNG), and Phoenix Group Holdings (LSE:PHNX).

These insurance giants have been getting a lot of investor attention lately as each profits from higher interest rates. But are these cheap stocks actually a bargain? Or is there something menacing waiting to lead investors astray?

The bull case

There’s a lot to be excited about for these insurance giants moving forward.

The tailwinds of higher interest rates will naturally subside as the Bank of England finishes its fight with inflation. Nevertheless, the UK’s ageing population is organically driving up demand for retirement financial products like annuities. And that’s something all three of these insurance titans are happy to supply.

At the same time, the UK’s Pension Schemes Bill and the expansion of defined contribution consolidation are expected to come into force later this year.

Combined, these policies mandate the merger of smaller pension pots that employees can gather over the course of a career into one. That means billions of pounds worth of stray pensions could be consolidated, creating an enormous growth opportunity for these industry leaders.

In other words, Legal & General, M&G, and Phoenix Group could be perfectly positioned to capitalise on a structural regulatory tailwind to drive medium-term growth.

What could go wrong?

While these insurance groups slightly differ in their product offers and strategies, they all share one weak spot – their dependence on the UK economy.

It’s no secret that strong GDP growth in Britain has been elusive for over a decade. And with all three businesses focused on the UK market, that makes them directly exposed. After all, wage stagnation means fewer pension contributions and fewer opportunities to sell new life insurance products.

What’s more, there’s also the question of competitive threats. The pension consolidation opportunity hasn’t been ignored by rivals, with platforms such as PensionBee, Nest, and AJ Bell all positioning themselves to take market share in this arena. And even with cheap valuations, if this rising competition results in an earnings slowdown, these cheap stocks could actually be a value trap.

The bottom line

Given the enormous dividend yields on offer, investors seeking exposure to the insurance sector may want to take a closer look at these opportunities. However, personally, the risk surrounding these businesses, even with lucrative-looking tailwinds on the horizon, is too high for my tastes. That’s why I’m looking elsewhere for bargain-basement stocks to buy.

The post 7.5%+ yields! 3 cheap stocks with big British dividends 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.

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