Generating a passive income from dividend stocks is a big part of my investment strategy.
Receiving a share of my companies’ profits in cash each year gives me a choice. I can withdraw the cash straight away, or use it to buy more shares in order to give my future income a boost.
Why choose shares for passive income?
Of course, dividends are never guaranteed and share prices can always fall. This means that investing in dividend stocks for passive income is not a direct substitute for the security of cash savings and other fixed income investments.
On the other hand, successful companies may be able to increase their dividends over time. If this happens, then their share prices may also rise, over longer periods. As I am still a long way from retirement, this kind of growth opportunity is definitely an attraction for me.
The FTSE 100’s top yielder
One income stock that’s on my radar right now is FTSE 100 life insurer Phoenix Group (LSE: PHNX). This £5bn business is actually the second-highest yielding share in the FTSE 100 based on 2024 broker forecasts, with a dividend yield of just over 10%.
This means that an investment of £10,000 today could provide an annual income of around £1,000.
I should point out that I would not always buy the highest-yielding shares on the market. Sometimes, such high yields are a sign that trouble is coming down the line. A cut may be likely.
I’m not worried about Phoenix, though. I’ve followed this company for several years and have been consistently impressed by the way it has met its financial targets and delivered steady dividend growth.
Why is Phoenix so cheap?
You might wonder why Phoenix shares are so cheap. I think there are a couple of reasons.
The first is simply that this sector of the market is out of favour at the moment. Legal & General and Aviva both offer yields over 8%. (I think they’re cheap, too.)
The other thing to remember about Phoenix is that part of its business involves buying existing insurance policies and running them to completion. This side of the business could, theoretically, dry up at some point in the future.
However, management aren’t blind to this risk. The group is steadily expanding its new business operations, including selling products under the Standard Life brand.
A recent update from the company confirmed that new business net fund flows rose by around 80% last year, to £7bn. The company said this means it has met its 2025 target for cash generation from new business two years earlier than planned.
The company’s workplace pensions business also seems to be doing well. Phoenix says that the net value of pensions scheme assets transferred into the business rose to £4.5bn last year, from £2.4bn in 2022.
What I’d do now
Phoenix shares aren’t without risk. But this business has a strong track record, in my view. I think the shares look very reasonably valued at current levels.
If I didn’t already have enough exposure to this sector, I would definitely consider adding Phoenix to my portfolio.
