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Why I’d buy top FTSE 100 stocks like this one to give me a passive income in retirement

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The last year’s been tough for those looking to generate dividend income from FTSE 100 stocks, as top companies slash or suspend shareholder payouts. Not all of them though. A hardy crew of blue-chips have sailed through the crisis, dividends unscathed. Insurer Phoenix Group Holdings (LSE: PHNX) was one of them.

I was delighted, given that it’s now one of my favourite FTSE 100 stocks. However, I wouldn’t buy it for share price growth, because it hasn’t delivered much of that. I’d buy Phoenix for its yield. Currently, it pays income of 6.53% a year, at a time when the average instant access account pays 0.18%.

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That makes it an attractive way to build my retirement wealth. I’ll reinvest those dividends to buy more stock while I’m working, then draw them as passive income after I retire.

Phoenix dividend rises

Phoenix is an insurer, but one with a different take to other FTSE 100 stocks in this sector. It buys up old life insurance and pension funds that are closed to new business, and manages them on behalf of members. This should be good news for policyholders, as managers who also run funds that are open to business treat legacy products as second best.

As Phoenix doesn’t rely on investor inflows, it should (in theory) have protection against a downturn. On the other hand, it needs to keep making acquisitions in order to grow. The more funds it can snap up, the greater the synergies and economies of scale.

Earlier this month, Phoenix posted record annual cash generation of £1.7bn. Better still, it’s now expecting cash generation of £4.4bn by 2023, up from its original £4.2bn target. This is good news for shareholders, because it’s the cash that keeps the dividends flowing. Dividends rose 3% last year and a cover of 1.5 adds to the impression of a really solid FTSE 100 dividend stock.

Assets under administration increased 36% to £338bn, boosted by the acquisition of ReAssure in 2020. That also helps.

One of my favourite FTSE 100 stocks for dividends

As with every stock, there are risks. Phoenix is buying the Standard Life brand from Standard Life Aberdeen, while its SLAL UK investment products move the other way. Integrating new purchases is always challenging. Also, there’s the wider risk of rising inflation and interest rates, which could hit stock market returns and knock the company’s cash flow projections.

Phoenix also has to keep finding attractive acquisitions to grow revenues. Success is not always guaranteed.

The Phoenix share price may never shoot the lights out, although it’s up a solid 12% on a year ago. I still expect dividends to provide most of my returns over the long term, and that’s fine by me. I reckon this is one of the very best FTSE 100 stocks for income, and that offsets my other worries.

Even better, Phoenix has a healthy balance sheet and strong capital coverage, while leverage of 28% is comfortably within its target range.

I’d buy and hold this FTSE 100 dividend stock for the long term.

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Harvey Jones 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.

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