The FTSE 100 has several stocks paying sufficient dividends to generate a healthy passive income. But only a handful pay around the golden 10% a year level. Over and above any other factors, this rate allows investors to double their money after 10 years, as long as it continues to be paid.
A life assurance and pensions industry powerhouse, the company name is not widely known. This means it sees very little support for its share price from small investors.
This is part of the reason why its shares have dropped 19% from their February high this year, I think. And why they are so close to their 52-week low of £5.01.
Valuation looks positive
In selecting stocks for my high-yield portfolio, I factor in whether the share price looks solid. The reason is that I do not want any or all my dividend gains to be wiped out through share price losses.
Of course, there are risks in Phoenix Group Holdings. The main one is that enduring high inflation and interest rates may cause a deterioration in the assets it manages. Indeed, the company did not make a net profit last year.
This means that a price-to-earnings ratio cannot be used for valuation. Instead, I looked at its price-to-book (P/B) ratio, which is currently just 1.1.
This compares very favourably to its immediate peer group — Aviva’s 1.2, Prudential’s 1.8, and Legal & General’s 2.6.
Business growth prospects
Although the company is not well known, several of its brands are, including Standard Life, Pearl Assurance, and Sun Life.
And despite the net loss of £1.85bn in 2022, it generated £1.5bn in cash and £1.2bn in new business growth. This allowed it to increase the dividend by 5% from 2021’s 48.9p.
For 2023-2025, it has a cash generation target of £4.1bn. This it sees coming from around £5bn of net fund flows into its workplace business and around £2bn into its retail business.
Additionally, it maintained a solvency ratio of 189%, well above management’s target of 140%-180%. This offers enormous scope for further investment for growth, I think.
Big income generator
All these factors look supportive to me of continued high dividend payouts. These have also been backed up by decent dividend coverage ratios.
A ratio above 2 is considered good, while below 1.5 it may indicate the potential for a future dividend cut.
Phoenix Group Holdings’ cover for 2022 was 1.6, for 2021 it was 1.62, and for 2020 it was 1.93.
If I invested £10,000 in the company now, I would make £980 this year in passive income from it. If such a payout level remained in place for 10 years, then my £10,000 investment would make another £9,800.
And that 98% 10-year return would not include further gains from any reinvestment of dividends or share price appreciation. On the flipside, it would not include any tax on my investment either, or any losses from share price falls, which is always a risk.
I already have high-yielding stocks in the same sector. If I did not, then I would buy some of its shares now without hesitation.