Better high-yield buy: Phoenix Group vs M&G shares?

Which is the better long-term income buy, M&G or Phoenix Group shares? It’s a tricky choice, and I wonder if I should just buy both?

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I’ve been looking at both Phoenix Group (LSE: PHNX) and M&G (LSE: MNG) shares, and I like what I see.

They’re in two of my favourite financial sectors right now, both of which are under the hammer in recent years. A quick look at the share price charts shows what I mean:

High yields

Those weak share prices have done one nice thing for income investors, though. They’ve helped boost the two dividends up among the highest in the FTSE 100.

The forecast M&G dividend yield stands at 9.7%, while Phoenix is on an even higher 10.6%.

To give us some idea of what that might achieve, the FTSE 100 average yield for 2023 is about 3.9% right now.

Investing £100 per month into a FTSE 100 tracker could generate £36,000 in 20 years at that rate (assuming no share price growth and ignoring costs).

By contrast, a 9.7% yield could bump that to almost £70,000, while 10.6% could push it close to £78,000.

Which is better?

Both potentially lucrative dividends, then. But the question is, which is better?

Well, broker forecasts put M&G on a lower price-to-earnings (P/E) ratio, which I think reflects more short-term risk.

The asset management firm has suffered cash outflows as investors’ pockets are squeezed. And earnings for the next few years should be less than half what they were in 2020.

And the longer we suffer from high interest rates, the more pressure there might be on the dividend.

Insurance risk

Phoenix, by contrast, essentially acquires and manages closed pension funds. That’s not too exciting, but I think it should carry less short-term risk.

The firm has recorded a couple of years of losses, though. And it’s down for a small loss this year before getting back to earnings growth.

On balance, I’d say we’re looking at different risk profiles, but driven by the same financial fears. And I don’t think I see much difference with a long-term view.

Next few years

They’ve picked up a bit in the past month, but Phoenix shares have fallen this year. In fact, they’re down 20% since the start of 2023, while M&G is up 9%.

A 20% fall doesn’t mean the stock can’t fall further. It’s possible the higher P/E multiple was a bit overheated, and we might be looking at a needed correction.

Phoenix has, after all, been one of the UK’s most bought stocks in 2023, according to AJ Bell. Perhaps a contrarian buy of M&G might just be a better pick right now?

My verdict

I’ve had both of these stocks on my watch list in 2023. They’re in two of my favourite long-term businesses, and I rate each if them as possibly the best in their sector.

My problem is that I’m quite biased towards financial stocks right now, with a bank and an insurer among my buys.

Still, when my favourite sectors are down, that’s when I should buy, right? I could easily go for both of these, but probably M&G first — just because I don’t hold an asset manager stock right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Aj Bell Plc and M&g Plc. 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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