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When it comes to passive income, I usually tell myself not to get swept away by dividend yields alone. Chasing the biggest payouts can be a quick way to stumble into a trap. But when a FTSE 100 stock boosts its yield from 3% to 6% in the space of a year, I can’t just shrug and walk away.
That’s exactly what happened with Admiral Group (LSE: ADM). In August, the insurer hiked its interim dividend from 51.3p to 85.9p per share. That’s an 86.4% increase, the sort of figure that makes even the most cautious investor sit up. And unlike many firms that end up offering high yields because their share price has collapsed, Admiral’s case looks very different.
When I bought earlier this month, the share price was up 26% year on year. That suggested a degree of strength. But almost as soon as I took the plunge, the stock slipped by 6.5% in just a couple of weeks. That left me wondering if I’d jumped in too early.
A tricky sector to navigate
The UK insurance sector is nothing if not unpredictable. Over the past month, Phoenix Group has dropped around 10% and Legal & General is down 8%. By contrast, Prudential is up 4% and Beazley has surged 10%. It’s a reminder that not all insurers face the same pressures.
Admiral’s recent wobble seems tied to specific events. In early September, Peel Hunt downgraded the stock to a Sell, pointing to weakening underwriting margins. Analysts also flagged softening interest rates as a risk, potentially squeezing returns on the investment side of the business. Those warnings likely triggered a wave of selling.
Still, there’s another side to the story. Most broker ratings remain positive, with the average price target sitting around 3,472p — about 9.5% higher than today’s levels. And when digging into the numbers, Admiral’s fundamentals look strong.
Revenue is up 22.6% year on year, while earnings have more than doubled with a 106% increase. Net income in FY 2024 almost doubled from the previous year too. Yes, the balance sheet carries debt, but profitability is impressive. The company’s return on equity (ROE) stands at a hefty 65.3%. That’s the kind of figure that suggests management knows how to generate returns.
Margins have narrowed slightly between H2 2024 and H1 2025, so the concerns aren’t baseless. If earnings were to shrink substantially, the dividend might come under pressure. That’s the biggest risk, in my view.
Thinking long term
Short-term share price jitters don’t bother me too much. When investing for income, I’m far more focused on the financial strength of the company, its dividend policy, and its track record of payouts. On those measures, Admiral is attractive.
Falling interest rates could dent profits in the near term, but I think investors should weigh up Admiral’s resilience. Over a 10-year horizon, it looks like a strong candidate for a passive income portfolio. For me, the chance to lock in a 6% yield with a firm that’s just delivered nearly 90% dividend growth was too good to ignore.
