A 10.5% yield but down 14%! Is this hidden gem the best passive income stock in the FTSE 100?
Few retail investors appear to know how good a dividend share the FTSE 100’s Phoenix Group Holdings (LSE: PHNX) is, I believe. Indeed, I would guess that not many could even say what business it is in.
I was the same until spring 2023 when the mini-financial crisis caused it to flash on my stock screener. It was showing a yield of over 10% at that point, given that returns rise as a share price falls.
As an investor who has focused on high-yielding shares since I turned 50 a while back, this caught my attention.
It turned out that Phoenix operates some of the biggest brands in the insurance world, including Standard Life. It is also the UK’s largest long-term savings/retirement business, supporting around 12m customers.
What’s the yield now?
Last year, it paid a dividend of 52.65p, a stunning 10.5% yield on the current £5 share price.
Whether or not it is the best is open to question but this makes it one of the very best stocks for generating passive income in any FTSE index. That is money made from minimal effort, such as share dividends.
However, analyst expectations are that the payouts will rise further. For this year, forecasts are for a 54.1p dividend, followed by 55.2p in 2025, and 56.8p in 2026.
These would generate respective yields based on the current share price of 10.8%, 11%, and 11.3%!
Can the business support these rises?
A firm’s dividend payouts (and share price) are powered long term by earnings growth.
One risk is the high level of competition in the sector. Another is market jitters of the sort seen in March/April 2023.
However, analysts project that Phoenix’s earnings will grow by a stellar 76.7% a year to the end of 2026.
According to Phoenix Group’s three-year strategy, it aims for £900m in IFRS adjusted operating profit by that point. It also targets £1.4bn in operating cash generation.
And it intends to continue to be operating within a 140%-180% shareholder capital coverage ratio at that stage. This measures a firm’s ability to meet its financial obligations and service debt. A ratio of 100%+ is considered good in Phoenix Group’s business sector.
Its H1 2024 results showed positive momentum in each. IFRS adjusted operating profit increased 15% to £360m. Operating cash generation rose 19% to £647m. And the shareholder capital coverage ratio stood at 168%.
How much passive income can be made?
£9,000 (the amount with which I began investing 30 years ago) of Phoenix Group shares would make £945 in passive income in the first year.
On the same average yield (which is not guaranteed), this would be £9,450 after 10 years and £28,350 after 30 years.
However, much more could be made if the dividends were used to buy more Phoenix Group shares – called ‘dividend compounding’.
By doing this on the same average yield, £16,602 in dividends would be made after 10 years, not £9,450. And £198,167 would be generated after 30 years instead of £28,350.
With the initial £9,000 included, the total value of the Phoenix Group holding would be £207,167. This would generate £21,753 a year in passive income by then!
Given this yield and its huge earnings growth potential, I will be adding to my existing stake in the firm very soon.
The post A 10.5% yield but down 14%! Is this hidden gem the best passive income stock in the FTSE 100? appeared first on The Motley Fool UK.
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More reading
- How I’d invest within a SIPP to target a 7% dividend yield
- £20,000 in this FTSE 100 stock could get me £2,170 passive income per year
- Down 12% in a month and yielding 10.7%! Is this November’s best passive income stock?
- A UK share with a growing dividend and a yield over 10%
- My £10-a-day plan to retire early on passive income!
Simon Watkins has positions in Phoenix Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
