A 10.3% yield but down 24%! Time for me to buy more of this hidden FTSE gem?

This FTSE 100 stock has one of the highest yields in the index, met its huge cash generation target two years early, and looks set for strong growth.

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FTSE insurer Phoenix Group Holdings (LSE: PHNX) first truly popped onto my investment radar in March last year.

Along with several other UK financial firms, it was tumbling in price on fears of a new financial crisis.

These had been sparked by the failures of Silicon Valley Bank and then Credit Suisse around that time.

To me, this looked nonsensical as far as British FTSE 100 financial firms were concerned. It overlooked the capital-strengthening ordered by the Bank of England after the 2007 financial crisis.

In search of yield

The mini-financial crisis also reminded me that I no longer wanted to wait for growth shares to recover in value.

I had done this during the Covid years, and now past 50 I did not want my semi-retirement delayed any further.

Admittedly, high-yield stocks also saw their prices fall, but many still paid dividends, which was something at least.

So I decided to keep just the very best of my growth stocks and otherwise to hold only high-dividend-paying stocks.

To this end, I set my stock screener to identify shares that paid 8% or more a year in dividend yield.

Why this figure? At that point, UK government bonds offered a 4%+ yield with no risk attached.

I could also get 6.2% from the similarly risk-free UK government-backed National Savings & Investments Guaranteed Income Bonds.

So, an 8% dividend yield meant I was charging 1.8% for the additional risk of investing in stocks.

High earnings potential

Phoenix Group currently yields 10.3%, and I think it also has high earnings growth potential.

This means to me that there is every chance it will increase its dividend payouts in the future.

It also means less chance of a prolonged share price fall that could wipe out my dividend gains.

In H1 2023, Phoenix Group made an operating profit before tax of £266m.

After tax, it recorded a loss of £245m. This was mainly due to losses arising from adverse market moves against investments taken to hedge its capital position.

The risk of poor hedging strategy in the future is one I am aware of. Another is a genuine new financial crisis.

These are both mitigated in my view by the company’s huge cash generation seen since then.

An unscheduled trading update on 1 February showed around £1.5bn of new business long-term cash generation delivered last year. This meant it had achieved its £4.5bn 2023-25 cash generation target two years early.

This huge cash war chest means the company should be able to keep paying high dividends with ease. It can also be a major driver for growth going forward.

Consensus analysts’ expectations are now that its earnings and revenue will respectively increase by 66% and 28% annually to end-2026.

Given these high growth prospects and stellar yield, I will be adding to my holding in Phoenix Group very soon.

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.

Simon Watkins has positions in Phoenix Group Plc. 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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