With yields over 8.8%, which of the FTSE 100’s top 5 passive income stocks do I think is the best?

Passive income hunters have plenty of FTSE 100 high-yielding shares to choose from.

The table below shows the current top five yielders.

Every investor’s interpretation of the ‘best’ stock is going to be different, depending on their objectives and circumstances. In my case, I’m looking for the one that’s mostly likely to continue paying out its dividend over the longer term.

Here goes …

Immediately, I’m going to discount Vodafone.

That’s because the table is based on amounts paid over the past 12 months. And in March, the telecoms giant announced a 50% cut in its dividend.

It made a similar reduction in 2019.

I think two cuts in five years excludes the stock from being considered one of the best.

Other candidates

In contrast, British American Tobacco (LSE:BATS) has increased its payout for 25 consecutive years.

However, I fear that as the company transitions away from traditional cigarettes, the cash available for dividends is likely to come under pressure. Vapes and other alternatives are more expensive to make, which means its margin will fall.

These new products are also facing increased restrictions from governments around the world. In a worst-case scenario, they could be banned altogether.

I’m sure British American Tobacco will continue to pay generous dividends for years to come. However, I believe there’s going to come a point when it will follow Vodafone’s lead and have to cut its payout. For this reason, I don’t think the tobacco company’s stock is the best for my passive income portfolio.

This leaves three candidates, all of which are in the financial services sector.

Phoenix Group has the highest yield (excluding Vodafone) but it reported a loss of £646m for the six months ended 30 June 2024. The insurer blamed “adverse economic variances due to higher levels of interest rates and global equities” for its poor performance. It also made a loss in 2023 (£88m) and 2022 (£2.65bn). This makes me question whether its dividend is sustainable.

M&G has all the credentials of an excellent income stock. But the asset manager’s recent share price performance concerns me. It’s fallen 18.5% since its peak in March 2024. Some of the above-average yield is caused by a falling stock market valuation rather than an increase in dividend.

My favourite

This leaves Legal & General (LSE:LGEN) which — I believe — is currently the best passive income stock for me. It’s pledged to increase its dividend by 5% in 2024. And then by 2% a year from 2025 to 2027. Of course, payouts are never guaranteed.

Analysts are expecting earnings per share of 19.41p in 2024. Based on a current (1 November) share price of 218p, this implies a price-to-earnings (P/E) ratio of 11.2 — comfortably below the FTSE 100 average — and identical to the company’s 10-year average. Looking ahead to 2026, the P/E ratio falls to a very attractive 8.4.

But like Phoenix Group and M&G, its financial performance is sensitive to global economic conditions. Also, lower interest rates are likely to impact its annuity business.

However, it has a huge pipeline (£24bn) of pension funds that it’s in negotiations to acquire. Also, the value of future profits from its insurance business is currently more than the group’s stock market valuation.

This post was originally published on Motley Fool