3 dividend stocks with the biggest FTSE 100 yields. Should I buy?

The FTSE 100’s filled with dividend stocks. And while the index overall only offers a 2.9% average yield, some of its constituents are far more generous, particularly in the insurance and asset management sector.

Right now, Legal & General (LSE:LGEN), Phoenix Group Holdings (LSE:PHNX), and M&G (LSE:MNG) have the highest payouts in the UK’s flagship index at 8.1%, 7.4%, and 6.8% respectively.

So are these large-cap businesses no brainer buys for my passive income portfolio?

Lucrative yields

While there are some notable similarities between these businesses, each one’s slightly different:

• Legal & General is a diversified insurance, asset management, and retirement specialist.
• Phoenix Group, soon to be renamed Standard Life in March, is a life insurance and pension consolidation firm.
• M&G offers a leading combination of asset management and insurance solutions.

Nevertheless, all three companies are positioned to benefit from several emerging trends. The rise of the UK pension risk transfer market is generating growth opportunities across the board, with the bulk purchase annuity activity heating nicely.

Meanwhile, with interest rates slowly being cut back, asset values across their client portfolios are climbing, while previously purchased bonds continue to generate high-interest recurring income. And with further rate cuts expected throughout 2026, equity valuations are on track to continue rising alongside their insurance assets.

In many cases, that means more fee-earning opportunities, bolstering cash flows and helping sustain their impressive elevated dividend yields on offer today.

So far, these FTSE 100 stocks sound like no-brainers. But what’s the catch?

Risk versus reward

Despite the encouraging near-term outlook, there remain some structural headwinds that could create some unpleasant earnings volatility. With the UK economic landscape and public finances in a less-than-ideal state, there’s growing concern about shifting gilt yields.

These mechanics are a little complicated. But in oversimplified terms, even a small unexpected rise in gilt yields can have enormous implications on long-dated bonds held by these financial institutions. And it could result in an asset-liability mismatch triggering surprise losses.

Legal & General and Phoenix Group have significantly larger annuity books compared to M&G, making them more exposed, and no doubt helps explain why their dividend yields are much higher – a reflection of the underlying risk.

Then there’s also the question of competition. Even if gilts don’t throw a spanner into the works, the pension risk transfer market is already starting to get crowded with other insurance groups seeking to cash in on the growth opportunity. And with dividend coverage already a bit tight, there may be little margin for competitive disruption at current valuations.

The bottom line

In light of all this information, where does that leave income investors? If interest rates continue to steadily fall and there are no major economic or financial market shocks, this trio of FTSE 100 stocks could prove to be a lucrative investment.

But there’s no guarantee. And if earnings end up taking a hit due to competitive or market forces, today’s attractive yields could quickly disappear.

In other words, investors are looking at a classic high-risk/high-reward income opportunity. Personally, with other income opportunities to explore, I remain untempted. But for investors who don’t mind the risk of share price and dividend volatility, these businesses could be worth a closer look.

The post 3 dividend stocks with the biggest FTSE 100 yields. Should I buy? 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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