When investors talk about income stocks, they often mean one thing: the highest dividend yields they can find. Screening for income usually starts with a simple filter — pick the companies paying the most generous payouts and build a portfolio from there.
But that approach may be leading investors to focus on the wrong end of the market. A high yield can look attractive on the surface, but it doesn’t always tell the full story about how sustainable that income really is, or how it might evolve over time.
That raises an important question: are investors genuinely identifying the best income stocks — or simply the highest-yielding ones?
Why yield alone can mislead investors
Over the past decade, there have been more than 130 dividend cuts across the FTSE 100. While many occurred during the Covid period, reductions have continued in more normal market conditions, with companies such as Mondi and Diageo cutting payouts more recently.
This highlights a key issue for income investors: dividend yields are not fixed. They can change quickly when earnings come under pressure.
It also matters where those yields are coming from. A large share of the FTSE 100’s highest dividend yields is concentrated in financial services and real estate companies, increasing exposure to sector-specific risks.
In practice, this means a high starting yield does not necessarily translate into a stable income stream. When profitability weakens, dividend cover can deteriorate and boards may be forced to cut payouts even if the yield initially looked attractive.
That is why focusing purely on yield can give a false sense of security. The more important question is not how much income a stock pays today, but how resilient that income is over time.
A different type of income stock
Investors who think about income stocks purely in yield terms will often overlook companies such as London Stock Exchange Group (LSE: LSEG). The dividend yield usually sits below many of the highest-paying FTSE 100 shares.
That misses the bigger picture: how the income is actually generated.
Over the past decade, the group has grown its dividend at a compound annual rate of more than 15%. That reflects a strong underlying business model rather than a high starting yield. The company does not rely on a fixed payout. Instead, it generates returns from recurring revenues, long-term contracts, and rising demand for its data and infrastructure services.
Management has also highlighted growing momentum in areas such as AI-driven data usage and digital market infrastructure. In the most recent period, major global institutions signed long-term contracts worth around £1.9bn, reinforcing the visibility of future revenues.
The key point is that this is not a traditional high-yield income stock. Instead, it is a compounding income business, where dividend growth is underpinned by structural demand trends rather than short-term yield attraction.
Bottom line
There are risks, however. Much of the investment case depends on continued reliance by financial institutions on its data and infrastructure platforms. If competitive dynamics change or pricing power weakens, growth could slow from recent levels.
Even so, I think this is a useful reminder that the best income stocks are not always the highest yielding. In my view, LSEG remains one for long-term income investors to consider, particularly those prioritising durability over headline yield.
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Andrew Mackie does not hold any positions in the companies mentioned.
