This stunning dividend share yields 8.8% and is trading at a 35% discount!

Phoenix Group Holdings (LSE: PHNX) is fast turning into my favourite FTSE 100 dividend share. What took it so long?

I tracked the stock for years before finally adding it to my Self-Invested Personal Pension (SIPP) in January 2024.

The yield was around 10% and the valuation looked dirt cheap, trading at six or seven times earnings. I assumed something must be wrong. Maybe the dividend wasn’t sustainable, and a cut was coming.

Phoenix is flying

But that didn’t happen. So I looked deeper and discovered Phoenix had increased its dividend in eight out of the previous 10 years. The only cut was during the 2020 pandemic, and that’s forgiveable.

It had a strong balance sheet, was generating solid cash flow, and the board insisted that it operated “a progressive and sustainable dividend policy”. It still says that today.

The dividend still looks secure. Phoenix lifted its total 2024 payout by 2.56% to 54p per share. Analysts now forecast 56p this year, a 3.7% rise. The yield is forecast to hit 8.8% in 2025 and 9.05% in 2026 – more than double what a top savings account offers. Of course, savings are safe. Dividends aren’t.

The flipside is that dividend stocks have growth potential too. The Phoenix share price is up an impressive 30% over the past year. That means a total return close to 40%, including the dividend. That’s impressive, but I’m not getting carried away. The stock is still trading around the same level it was five and 10 years ago.

Strong outlook

So much for past performance. What happens next?

Phoenix expects to generate £1.1bn of excess cash between 2024 and 2026. Much of that will go towards paying down debt, but some will wend its way to me, via dividends.

On 21 May, Citi upgraded Phoenix from Neutral to Buy, lifting its price target from 537p to 730p. That’s 14.5% above today’s 637p. Add the dividend, and my potential 12-month return could hit 25%. If forecasts play out, that is. In practice, they’re merely educated guesses.

Citi said Phoenix is changing. No longer just a back book consolidator, it’s also building a bulk annuity franchise and is strengthening its retirement savings business. The broker reckons the 9% yield “seems very well supported” and expects the shares to close their 35% valuation gap versus peers.

It would be nice if that all came good. Phoenix does face risks, though. The bulk annuity market is getting crowded and rivals are more established. Insurance is a mature and competitive business, where growth doesn’t come easy.

Today’s 8.44% yield is the third-highest on the FTSE 100. But dividend stocks still face competition from cash and bonds, which yield less but offer more safety. That may change when interest rates fall — but maybe they won’t?

I’ve enjoyed the share price growth but the yield remains the main attraction here. Phoenix may soon rebrand as Standard Life but whatever it brands itself, I’m a fan. In fact, I’m even considering buying more.

The post This stunning dividend share yields 8.8% and is trading at a 35% discount! appeared first on The Motley Fool UK.

More reading

• Should I buy these FTSE 100 dividend stocks with 8%+ yields before it’s too late?
• ChatGPT thinks these are the 3 best high-yield dividend stocks to buy today
• Want to build a million pound SIPP within 25 years? Here’s how!
• Up 25% in a year plus an 8.5% yield – this ultra-high income stock is on fire!
• Here’s how investors can target £6,717 a year in passive income from a £5,500 holding in this FTSE 100 dividend gem!

Harvey Jones 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.

See author's posts