5 risks UK investors should understand before buying dividend stocks in 2026
Image source: Getty Images
When mortgage rates fall and savings accounts yield 3%, if lucky, the appeal of dividend stocks is impossible to ignore. I FTSE 100The average yield of 3.4% looks attractive on paper, and some names – such as Legal & General at 8.1% – appear to offer watering returns.
However, this income test covers five key risks that can leave portfolios vulnerable if investors are not careful.
Dangerous concentration
Footsie’s dividend yield is shockingly concentrated. The top five dividend payers account for 28.7% of total dividend payments, while the top 15 broad-based companies represent nearly 60% of the index’s income.
This creates structural risk: the FTSE is down 30% during Covid but dividend payments are down 10%. But if those fixed-rate payers face income pressures at the same time, the cuts could be severe.
The life insurance time bomb
Life insurance dominates the high-yield area, with Legal & General again Phoenix Group providing 8.1% and 7.9% respectively. This concentration in one sector increases the risk. Since the interest rate is now expected to reach 3% by the end of the year, the rates will be reduced in the millions owned by these companies.
The paradox: falling prices make stocks more attractive at the same time that they destroy the earnings that support them.
Housebuilder cyclicality
Taylor Wimpey it yields 9.2%, but the yield hides underlying problems. The sector also faces margin pressure from declining construction costs, uncertain demand recovery and regulatory risk in terms of supply chain changes and tax policy. If completions slow or costs rise, benefits are at risk — regardless of current policy changes.
Dividend cover is deteriorating
Many high yielders are currently struggling with dividend cover. Real Estate Securities (LSE:LAND) illustrates the challenge well. The company’s payout ratio stands at 167%, which means it has distributed more cash to shareholders than it is receiving from current earnings. But, seriously, it also shows why this condition may be temporary instead of terminal.
A case study in dividend repatriation
With a valuation of £9.3bn, Lansec owns and manages premium commercial and residential property in the UK. paid a dividend of 6.5 %. The company is increasingly attractive to mainstream investors seeking exposure to London’s property market recovery – and recent management updates suggest the acquisition narrative has some basis in fact.
However, it faces significant challenges. With a payout ratio of 167%, the company returns more than current earnings to shareholders. This is only sustainable if income growth is noticeably faster. And with £4.65bn in total debt to just £424m in EBITDA, there is a risk it may have to cut profits if earnings do not improve.
It is encouraging that the latest half-year results suggest that the management has made a credible change. The company has sold £644m of low-return assets, with a further £1bn planned over the next three years, redirecting capital into high-return assets. And it looks like it’s already working, with like-for-like rental income growing at 5.2% in H1 2025, office occupancy at 98.8% and retail occupancy at 96.7%.
Also, the mall’s trading in the last Golden Quarter showed sales that exceeded the market.
An important point
High dividend yields are not free money – they compensate investors for risk. Before buying dividend stocks, always check the dividend cover, credit, sector risk and performance.
Landsec offers opportunities for meaningful change, but it requires patience and confidence that management can implement their strategy. As always, there is moderate risk.
Nevertheless, I think it is one of the most promising stocks to consider this year.
