Here’s how investors can target £6,717 a year in passive income from a £5,500 holding in this FTSE 100 dividend gem!

FTSE 100 savings and retirement business Phoenix Group Holdings (LSE: PHNX) is a core passive income holding for me. Passive income is money made from minimal effort, the best example of which is dividends paid by shares in my experience.

In 2024 it paid a dividend of 54p, which is 14% higher than the 47.5p paid in 2020. On the current share price of £6.17, this generates a dividend yield of 8.8%.

That said, these payouts change as a stock’s price and annual dividend alters.

However, analysts forecast that Phoenix Group will raise its dividend to 55.8p this year, 57.3p next year, and 58.8p in 2027.

This would give respective yields based on the current share price of 9%, 9.3%, and 9.5%.

By comparison, the present average yield on the FTSE 100 is 3.5% and on the FTSE 250 it is 3.4%.

What does this mean in monetary terms?

Investors using £5,500 (half the £11,000 average UK savings) for a holding in Phoenix Group would make £484 in dividends in the first year on the 8.8% yield.

On the same basis this would rise to £4,840 over 10 years and to £14,520 over 30 years.

This is a lot more than can be made from a standard UK savings account, of course.

But it could be far greater if the dividends were reinvested back into the stock – a standard investment process called ‘dividend compounding’.

What would the compounded returns be?

Using this method on the same £5,500 stake and 8.8% yield would generate £7,717 in dividends after 10 years, not £4,840. And over 30 years of such compounding it would be £70,834 rather than£14,520.

At that point – adding in the initial £5,500 stake – and the value of the Phoenix Group holding would be £76,334. This would generate £6,717 in passive income from dividends every year at that stage!

A potential profit on the share price too?

A risk in the business is a further surge in the cost of living that might cause customers to cancel their policies.

However, analysts forecast that Phoenix Group’s earnings will rise by a spectacular 94.8% each year to the end of 2027. It is growth here that powers any firm’s share price over time – and its dividends too.

Moreover, its 2024 results released on 17 March showed IFRS adjusted operating profit jump 31% year on year to £825m. Positively as well, the firm upgraded its IFRS adjusted operating profit target to around £1.1bn from £900m by end-2026.

I ran a discounted cash flow (DCF) analysis to translate all this into share price terms.

The DCF in Phoenix Group’s case shows the stock is 22% undervalued at its current £6.17 price.

Therefore, the fair value for the shares is £7.91, although they may go lower or higher due to market vagaries.

Will I buy more of the shares?

I believe Phoenix Group’s stunning earnings growth prospects should push its dividend yield and share price much higher over time.

Given these factors, I will buy more of the shares very soon.

The post Here’s how investors can target £6,717 a year in passive income from a £5,500 holding in this FTSE 100 dividend gem! appeared first on The Motley Fool UK.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More reading

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.