Dividend yields above 8%! Which of these cheap FTSE 100 shares should I buy?

These dividend shares offer some of the largest yields on the UK market. But are they sustainable for long-term passive income?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Female analyst sat at desk looking at pie charts on paper

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 index has several dividend-paying shares with yields above 8%. I count six, but which should I buy?

The highest yielder on my screen is telecoms company Vodafone. City analysts predict a dividend of 7.4 euro cents per share for the trading year to March 2025.

With the share price near 67.80p (26 March), the forward-looking yield is above 9% at recent currency rates.

Unreliable dividends

However, as tempting as that might be, Vodafone has committed the biggest sin on my list for a dividend stock: it’s cut the payout. Since 2018, there have been more down-years than up-years for the dividend.

Vodafone may raise dividends again in the future, but the stock is off my list for now.

The next-highest yield comes from Phoenix. The company acquires and manages closed life assurance and pension funds. 

With the share price around 529p, the forward-looking yield is just above 10% for 2024. That’s big, and the business has managed to raise the dividend a bit each year since at least 2017.

So, what is there to dislike? The main problem for me is that it’s hard to peer inside the workings of financial outfits like this. The business is outside my ability to judge its prospects very well, so I’ll avoid it.

Regulatory risk

Next, we have British American Tobacco and Imperial Brands. However, despite their high yields, I choose to ignore them because I’m worried about the regulatory risks hanging over the industry. On top of that, they serve markets with long-term declining volumes and both carry heaps of debt.

It’s possible the tobacco stocks could go on to serve dividend investors well in the coming years, but I’m out.

Meanwhile, back in the financials space, M&G looks interesting. With the share price near 236p, the savings and investment company has a forward-looking dividend yield of just under 9% for 2025.

However, dividends only started in 2019 when the company joined the stock market after demerging from Prudential. That short record makes me cautious.

M&G could serve investors well, but I prefer the look of Legal & General (LSE: LGEN).

Steady shareholder payments

With the share price in the ballpark of 255p, Legal & General’s anticipated dividend yield is about 8.8% for 2025.

Meanwhile, the company has raised the payment a bit each year since 2018, apart from the pandemic year in 2020 when the dividend remained flat. Nevertheless, the compound annual growth rate (CAGR) of those increases is running at a comfortable 4.37%.

However, Legal & General provides financial services, and the sector can suffer from cyclicality and volatility. We can see the effects of that playing out in the firm’s volatile multi-year record for earnings and cash flow.

One of the main risks for long-term investors, as I see it, is the stock price and dividends may get caught up in those cyclical gyrations in the coming years.

However, recent outlook statements from the company have been upbeat. So, on balance, I’d choose Legal & General for deeper research. My aim would be to hold some of the shares for the long term in order to harvest the stream of dividends. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c., Imperial Brands Plc, M&g Plc, Prudential Plc, and Vodafone Group Public. 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.

More on Investing Articles

US Stock

Here are the best-performing S&P 500 stocks after the US election result

Jon Smith notes some of the largest gainers from the S&P 500 yesterday and explains how the election result has…

Read more »

Growth Shares

2 UK stocks knocking on the door of promotion to the FTSE 100

Jon Smith points out a couple of UK stocks that he feels could be ready for the big league based…

Read more »

Investing Articles

Rolls-Royce shares just fell 7%. Is it time to buy?

This investor in Rolls-Royce shares takes a look at the FTSE 100 engine maker's trading update to see what caused…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

What’s going on with the Auto Trader share price?

Paul Summers takes a closer look at why the Auto Trader share price has tumbled despite the company posting higher…

Read more »

Investing Articles

Legal & General shares look set to give me a mind-blowing 10.22% yield in 2026!

Harvey Jones is getting a brilliant second income from his Legal & General shares and expects even more to come.…

Read more »

Investing Articles

I’d consider this beaten-down FTSE 100 dividend stock to target a second income of £19,000

Our writer sees an opportunity to earn a substantial second income by investing in this UK insurance giant. Here’s his…

Read more »

Investing Articles

How cheap is the 72p Vodafone share price?

The Vodafone share price looks very cheap having fallen to a 72p price tag. But is it really the bargain…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Up 43% in a year and the IAG share price could keep on rising!

One of the FTSE 100’s highest-flying stocks still looks cheap on an earnings basis. Is this a brilliant buy for…

Read more »