A well-covered 8.6% dividend yield and 9 years of growth! Is this one of the best income stocks in the UK?
When hunting down the best income stocks, a lot of investors are tempted by the promise of high yields. Often, these generous payouts arenât sustained, resulting in shareholders being lured into a trap. But every once in a while, an exception emerges. And investors get the rare chance to lock in both a high payout and a long track record of dividend hiking activity.
One such example of this could be Phoenix Group Holdings (LSE:PHNX). The insurance giant offers an impressive 8.6% yield right now, comfortably covered by expanding operating cash flows that have led to a decade of payout hikes.
So is now the time to consider adding this income stock to a portfolio?
Inspecting the opportunity
As a quick crash course, Phoenix is an evolving life insurance enterprise. Historically, it specialised in finding and buying closed books of in-force life insurance and pension policies, letting them run to generate a predictable cash flow. But in more recent years, itâs shifted its core strategy to become a more complete insurance enterprise with a diverse collection of pension and annuity products.
While this move introduced a lot of execution and competitive risks, so far, Phoenix seems to have risen to the challenge, delivering solid financial performance that has continued to support dividend growth.
By timing the transition with a period of rising interest rates, Phoenix has enjoyed capital momentum that has continued into 2025.
In turn, operating cash flows have expanded by 9% to £705m across the first half of the year, more than enough to cover the £274m in dividends paid. And with a strong annuities pipeline, analysts continue to be optimistic for larger shareholder rewards over the next two years.
What could go wrong?
While Phoenix is performing admirably today, some notable macroeconomic risk factors could interrupt the process. Higher interest rates have been a terrific boon. But with the Bank of England starting to ease its monetary policy by cutting rates, the gravy train seems to be slowing.
Consequently, there are rising concerns of tougher comparables on the horizon for both revenue and, more importantly, cash flow.
To managementâs credit, efforts to deliver cost savings and reduce balance sheet leverage are expected to offset some of the impact of looming headwinds. But whether that will be sufficient to maintain the dividend hiking streak remains a primary source of uncertainty.
The bottom line
All things considered, Phoenix Group appears to be well-positioned today. At a forward price-to-earnings ratio of 9.4, the income stock doesnât trade for a demanding valuation. But much like its substantial dividend yield, this is a reflection of the macroeconomic risk attached to this enterprise.
Such opportunities are always worth investigating. But investors will have to consider carefully whether the high yield is worth the macro risks. Personally, Iâm looking at other income stocks for my portfolio.
The post A well-covered 8.6% dividend yield and 9 years of growth! Is this one of the best income stocks in the UK? appeared first on The Motley Fool UK.
Should you invest £1,000 in Phoenix Group Holdings plc right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Phoenix Group Holdings plc made the list?
More reading
- £10,000 of Phoenix Group shares could net me £840 yearly passive income!
- The Phoenix share price fell 10% last week â should income investors consider grabbing its 8.6% yield?
- How much do you need in an ISA to target a £1k monthly passive income?
- Is 8% a realistic yield target for an ISA?
- Here’s how much passive income this 8.4% FTSE dividend stock could pay after 10 years
Zaven Boyrazian has no position in any of the shares mentioned. 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.
