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FTSE 100 dividend income stocks are a wonder to behold. Some yield as much as 7% or 8% a year, and that’s only part of their charm. When conditions are right, they can also generate plenty of capital growth on top.
Investors shouldn’t expect them to behave like whizzy growth shares though. Their capital returns tend to come in bursts, and there are times when prices will stagnate or fall. Yet with luck, the dividends should keep rolling in, and if reinvested the returns can compound nicely over time.
No guarantees, of course, which is why it pays to build a balanced portfolio of at least a dozen shares, mixing income and growth to spread risk.
High FTSE 100 yields
I hold growth shares in my Self-Invested Personal Pension (SIPP), but my biggest income stream comes from three high-yielders I bought a couple of years ago, when they looked incredible value. Each traded on a low price-to-earnings ratio of around six or seven, roughly half the index average of 15 at the time.
They’ve all rewarded me with rising share prices and steady dividends. The trio? Legal & General Group (LSE: LGEN), M&G and Phoenix Group Holdings.
Steady payers
There’s one obvious risk here. They’re all in the financial services sector, so concentration is high. I’ve offset that elsewhere in my SIPP, but I still went slightly ‘overweight’ because I felt this was a once-in-a-cycle opportunity. So far, I’ve mostly been proved right.
The M&G share price is up 33% over one year and 80% over five. That’s impressive for a supposedly staid blue-chip. The yield today sits around 7.6%, down from more than 9% when I bought. Reinvesting those payouts pushes the total five-year return close to 120%.
Phoenix has also had a strong year, rising 35%, though its five-year gain is just 3%. Even so, its 7.9% yield is among the richest in the market. Legal & General has lagged over the last year rising 8.7%, but it’s up 30% over five. Its yield is the juiciest of the three at 8.9%.
Counting the returns
Someone investing their full £20,000 ISA allowance equally across the three could collect around £1,620 in dividends next year. In practice, it might be slightly more since all three boards are committed to small annual payout increases of around 2%. That’s another attraction of dividend stocks, the income tends to grow over time.
Legal & General’s latest trading update on 23 October confirmed it expects 2025 core operating earnings per share growth at the top end of its 6% to 9% target range. It also highlighted a big new opportunity in company pension risk transfers.
With £1.1trn in total assets under management, the group could suffer if there’s a market sell-off, but equities look resilient for now. The UK economy remains sluggish, and competition from sector rivals Aviva, M&G and Phoenix is fierce.
Even so, Legal & General looks well placed to benefit from growing demand for retirement products, private markets and annuities. I think it’s worth considering today.
Long-term focus
Income investors would get a generous shot of cash by combining these three stocks in one ISA, but they should only do so if they’re properly diversified elsewhere. As always, anyone considering buying should think long term and keep reinvesting those dividends.
