Many of us buy dividends stocks — companies that reward shareholders with regular payments — in order to earn a passive income. Others, like me, hold dividend stocks in their portfolios and reinvest those dividends every year, leading to compound returns.
Today, I’m looking at two of the biggest-yielding dividend stocks on the FTSE 100. These are Legal & General (LSE:LGEN) with its 8.5% dividend yield, and Phoenix Group (LSE:PHNX) with its huge 10.4% yield.
So which one is best?
The dividend
The dividend yield is a fundamental metric that represents the annual dividend income as a percentage of the stock’s current price. A higher yield is generally more attractive, but extremely high yields may signal financial distress, or an unsustainable dividend.
As such, it’s necessary to conduct some research and gain a better idea whether the dividend is sustainable. The first place to look is the dividend coverage. This shows us how many times a company can pay its stated dividend from earnings.
Moreover, we can also look at a company’s dividend history. If a company has paid a dividend for years on end without a break, it could be a good sign.
So how do these firms compare?
Dividend Yield
Dividend Coverage
Dividend History
Legal & General
8.5%
2 times
Uninterrupted since December 2006
Phoenix Group
10.4%
1.6 times
Uninterrupted since December 2009
The above data suggests that Legal & General might be a safer choice, but the yield is around 20% lower than Phoenix Group.
Fundamentals
Comparing stock fundamentals involves evaluating key financial metrics such as earnings, revenue, cash flow and debt, to assess a company’s overall financial health and performance.
While both these companies operate in the same sector — insurance and pensions — they employ different business models. Phoenix Group is known for buying and managing mature or closed policies and running them through to maturity. It operates with greater leverage than some of its peers in the industry.
However, as the way companies in the insurance sector deliver their accounts can be confusing, I’m looking at several different metrics.
Legal & General
Phoenix Group
24M Beta
0.96
0.72
Debt/Free Cash Flow
94.3
84.6
Float
96.5%
83.5%
4-Year Average Dividend Yield
7.2%
7.7%
While the other three metrics might be more obvious, 24M Beta is a measure of volatility over 24 months. Stocks with a Beta rating below one tend to demonstrate low volatility. Honestly, there isn’t much between these firms.
Valuations
Finally, I’m looking at valuations. In the chart below, I compare EPS forecasts and price-to-earnings valuations.
LGEN EPS
LGEN P/E
PHNX EPS
PHNX P/E
2023
17p
13.6
1.54p
322
2024
24.9p
9.2
18.7p
26
2025
27.2p
8.4
27.4p
17.8
However, I’d take these forecasts with a pinch of salt, given the way these companies report profits. The above data suggests Legal & General is cheaper. But Hargreaves Lansdown suggests both insurers are currently trading at 5.9 times earnings. I’d be inclined to take Hargreaves’ figures which use adjusted EPS data.
To repeat, there really isn’t much between these two companies, and that’s why I own both. Of course, the insurance sector isn’t risk-free, especially with high inflation which makes repricing difficult. Nonetheless, I find sector very attractive and rather stable.
If I had to choose just one, I’d probably go for Legal & General as it has less leverage and stronger dividend coverage.
The post 10.4% and 8.5% yields: which of these dividend stocks is best? appeared first on The Motley Fool UK.
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James Fox has positions in Hargreaves Lansdown Plc, Legal & General Group Plc and Phoenix Group Holdings plc. The Motley Fool UK has recommended Hargreaves Lansdown 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.
