The FTSE 100 has enjoyed somewhat of a volatile 2023 — falling to a recent low of 7,291 points on 27 October before recovering to 7,402 points today.

Still, the UK’s premier index remains down by 1.9% year-to-date. Despite being filled with miners, oilers, and banks, many of which are profiting from historically higher commodity prices and tightening monetary policy, the index is likely reacting to wider geopolitical instability. For perspective, FTSE Russell data indicates that FTSE 100 companies generate circa 80% of their revenue from overseas.

Further, the UK’s macroeconomic situation remains subject to significant variability. While the Bank of England has chosen to retain the base rate at 5.25% for now, CPI inflation remains more than triple the official 2% target at 6.7%.

And on the fiscal policy side, the Autumn statement later this month could yield yet more uncertainty. Chancellor Jeremy Hunt has steadfastly refused to entertain the idea of significant tax cuts, despite significant political pressure to do so. Given the lateness of the election cycle and the state of the polls, some tax cuts may nevertheless be incoming.

Accordingly, though the following three shares are currently the highest yielding on the index, it’s important to note that these yields may not be sustainable — and further — are subject to wider macroeconomic pressures. Phoenix Group has its debt pile, Vodafone shares a poor share price track record, and M&G’s popularity could see it become overvalued in time.

For context, housebuilder Persimmon was consistently one of the highest-yielding FTSE 100 stocks for several years and has now been demoted to the FTSE 250 in the face of the weaker housing market. Past performance is not an indicator of future returns.

Best FTSE 100 dividend stocks to watch?

1. Phoenix Group

With a dividend yield of 11.2%, this popular insurance company may be tempting to value investors eyeing its 24.7% share price fall year-to-date. For context, the company paid out 50.8p to investors last year — and the average analyst expectation is that this will increase to 52.6p in 2023.

In H1 results, the FTSE 100 business reported cash generation of £898 million, above analyst predictions, allowing the company to boost its interim dividend by 5% to 26p per share.

Given that Phoenix Group is now on track to generate £1.3 billion to £1.4 billion of cash generation for the full year, the dividend could now be safe — especially with its solvency II ratio of 180% at the top of the 140-180% management target.

However, there are risks. Its bonds are likely falling sharply in value as rates continue to rise, and Phoenix also has a debt pile to manage.

JP Morgan analysts have cut their price target from 655p to just 430p, and downgraded Phoenix to underweight, arguing that ‘the stock has too much debt leverage relative to peers, which creates numerous capital and growth risks in the long term.’

2. Vodafone

Vodafone shares have fallen by 46.5% over the past five years, and now offer a 10% dividend yield with a price-to-earnings ratio of just 2. While this may seem like an exceptional opportunity at first glance, it’s important to place these numbers into context.

Vodafone saw after-tax revenue of €11.84 billion in the financial year to March 2023 — but this was heavily warped by one-off asset sales, including the €8.61 billion generated from the sale of Vantage Towers. If you remove the gains made from these sales, the price-to-equity ratio is significantly higher.

However, the dividend itself appears relatively safe — Vodafone is selling more assets, including its Spanish arm for ‘at least’ €4.1 billion, more than enough cash to pay a dividend of €0.09 a share, as it has every year for the past six years.

While some analysts think the dividend could be cut, the FTSE 100 telecoms operator reports results next week — investors don’t have long to wait to find out.

3. M&G

With a dividend yield of 9.8%, M&G is seemingly going from strength to strength. The savings and investment provider plans to generate operating capital amounting to £2.5 billion by the end of 2024.

Happily, the FTSE 100 dividend stock has now achieved more than 50% of this three-year target, 18 months in — meaning it is on track. And its shareholder Solvency II Coverage ratio remains at the top end of the target range at 199%, with no defaults in the first half of the year. Yet even having risen by 7.6% year-to-date, it still boasts a near double-digit dividend yield.

And in half-year results, M&G increased its interim dividend by 5% to 6.5p per share. For context, it saw positive net client inflows of £700 million — remaining positive into a third consecutive year. M&G also saw operating capital generation rise by 17% year-over-year to £505 million, driving adjusted operating profit 31% higher to £390 million.

CEO Andrea Rossi enthuses that the results ‘demonstrate the underlying strength of our business model, the resilience of our balance sheet… we have made progress against all three pillars of the strategy that we launched in March.’

The company’s strategy continues to shift with the times; it recently closed its property fund due to weak retail investor demand — but has also unveiled its first European long-term investment fund, which will invest in private credit.