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

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: LNG).

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.