805 shares in this FTSE 100 dividend gem could allow investors to target £4,612 a year in passive income!
FTSE 100 insurance and investment giant Phoenix Group Holdings (LSE: PHNX) paid a dividend of 54p last year. On the current share price of £6.83, this gives a dividend yield of 7.9%.
By comparison, the current average FTSE 100 dividend yield is just 3.4%. And the ârisk-free rateâ (the 10-year UK government bond yield) is 4.7%.
The average UK savings amount is presently £11,000, so half of this would buy 805 shares in Phoenix Group. On the current 7.9% yield, these would generate £435 in first-year dividends. This would rise to £4,350 after 10 years on the same yield and to £13,050 after 30 years on the same basis.
Supercharging returns with dividend compounding
That said, the dividend payouts could be turbo-boosted through the use of dividend compounding (the standard investment practice in which dividends are reinvested back into the stock that paid them).
It is a similar idea to leaving interest to accrue in a regular bank savings account. But the effect on the overall dividend returns over time can be spectacular.
Specifically here, the same 805 shares on the same 7.9% average yield would make £6,587 in dividends after 10 years, not £4,350. And after 30 years of dividend compounding, this would increase to £52,880, rather than £13,050!
By then, the total value of the Phoenix Group holding would be £58,380, and this would generate a yearly passive income of £4,612.
Passive income is money made with little effort, as with dividends from stocks.
The dividend yield’s forecast to go even higher
A shareâs dividend yield moves in the opposite direction to its price, provided the annual dividend stays constant. Consequently, as Phoenix Groupâs share price has risen over the past year, its dividend yield has declined.
However, it has also increased its dividend every year since 2020. In fact, it has gone up 14% over that period â from 47.5p in 2020 to 54p in 2024.
Moreover, consensus analystsâ forecasts are that this trend will continue. Specifically, the projections are for the dividend to rise to 55.8p this year, 57.4p in 2026, and 58.9p in 2027.
These would generate respective yields on the current share price of 8.2%, 8.4%, and 8.6%.
Of course, it is earnings that ultimately power any firmâs dividends (and share price) higher over the long term.
A risk to Phoenix Groupâs is any further surge in the cost of living, which may cause investors to close their accounts.However, consensus analystsâ forecasts are that Phoenix Groupâs earnings will increase by a stunning 96.3% every year to end-2027!
My investment view
I bought shares in the firm in the aftermath of March 2023âs mini-financial crisis. This followed the failure of Silicon Valley Bank, which triggered fears of a new financial sector meltdown.
Since then, the stock has been a cornerstone of my passive income portfolio. It has delivered consistently high dividend payments and a big share price gain to boot.
I believe its stellar earnings growth will enable it to keep raising dividends as it has done in the previous few years. I think it will do the same for its share price. Given these factors, I will buy more of the shares as soon as possible.
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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.
