With the FTSE 100 still recovering from the 2022 stock market correction, plenty of its constituents now offer tasty dividend yields. As such, investors are spoilt for choice when looking for new opportunities to bolster their portfolio’s passive income.
With that in mind, let’s take a look at the top 10 highest-paying dividend stocks within the UK’s flagship index.
10 huge dividend yields
| Company | Industry | Dividend Yield |
| Vodafone | Telecommunications | 10.6% |
| M&G | Financial Services | 10.4% |
| Phoenix Group | Insurance | 9.6% |
| Taylor Wimpey | Real Estate | 9.2% |
| British American Tobacco | Consumer Staples | 8.8% |
| Barratt Developments | Real Estate | 8.7% |
| Legal & General | Insurance | 8.7% |
| Imperial Brands | Consumer Staples | 8.0% |
| Aviva | Insurance | 7.9% |
| Rio Tinto | Mining | 7.7% |
Today, the FTSE 100 index has a dividend yield of 3.9%. But looking at these top 10 stocks, the average sits closer to 9% – more than double! And looking at the variety of industries, these firms collectively look like the start of a reasonably diversified high-yield income portfolio.
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At this rate of return, an investor who split £10,000 equally across all 10 stocks could expect an annual passive income of £900. And that’s before factoring in any potential gains from share price appreciation. Needless to say, that’s an impressive return on investment for very little effort and even outperforms the FTSE 100’s average total return of roughly 8% per year.
In a perfect world, this would be the end of the story, and I could go ahead and start generating free money. Sadly, the reality is a bit more complicated. And actually, building this portfolio in practice would more than likely destroy wealth rather than create it.
The dividend trap
High-yield stocks often lure new investors into a false sense of security. The promise of chunky cash dividends often convinces people to pay less attention to the fundamentals behind them. And all too often, the numbers are shaky at best.
It’s critical to understand that dividends, just like everything in the world of investing, are not guaranteed. They are discretionary payments determined by management teams to return excess cash to shareholders. The key word there is “excess”.
If the revenue stream starts to dry up, or rising costs wipe out profit margins, dividends will likely be put on the chopping block. And that certainly seems to be a real risk for a multiple of these stocks.
For example, as a mining company, Rio Tinto is highly sensitive to changes in metal commodity prices. These are beyond the firm’s control, and as supply chains get fixed, prices are steadily dropping.
As such, earlier this year, the group announced a 38% crash in profits, causing management to cut dividends in half. And given that commodity prices have since continued to fall, a similar announcement may be lurking just over the horizon.
Therefore, investors can’t just blindly buy into high dividend yield stocks and expect results. Time must be invested to carefully examine what’s funding shareholder payouts. And if it looks like earnings are in trouble, it’s often better to steer clear.
