10% yield! 2,250 shares in this FTSE 100 stock will give me passive income of £100 a month

This brilliant dividend stock offers the highest level of passive income on the entire FTSE 100. But can such a high yield really be sustainable?

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I’m building a portfolio of FTSE 100 dividend stocks to generate a high and rising passive income for my retirement. I’m keen to buy more of this hidden gem that offers the highest dividend yield on the index.

The stock is savings and retirement business Phoenix Group Holdings (LSE: PHNX), which is forecast to yield a bumper 10.3% in 2023. 

For many investors – and I include myself in this – a return of that scale would normally set alarm bells ringing. Dividends typically fly into double-digit territory purely because the company’s share price has been falling. It drives up the yield by simple maths. It’s often a sign of a company in trouble, rather than a thriving one.

Too good to be true?

The Phoenix share price has taken a beating. It’s fallen 26.29% over five years and 19.84% over one. The price-to-earnings ratio is super low at just 6.23 times earnings, which in theory makes it a bargain.

Either that or a value trap. Phoenix shares did climb 3.36% in the last month, but that’s about as exciting as it gets.

That isn’t putting off private investors though. This is now the second most purchased UK share of all, according to AJ Bell. Beaten only by another high-yield insurance giant, Legal & General Group. That still hasn’t revived the share price though.

Nor did an update on 1 February informing markets that Phoenix had hit its 2025 growth target two years early with new business net fund flows up 80% in a year. Cash flows look strong but we will know more when Phoenix publishes its annual report on 22 March.

I’ve been building up my stake in Phoenix ahead of that, investing modest amounts in January and again in March. I’m now the proud owner of 515 shares, currently worth £2,626. That’s not much, but as a freelancer I’ve just had a tax bill to pay. I’d keen to buy more, ideally while it’s still cheap and the yield is ultra-high.

So how much stock do I need?

I’m on course for dividends over around £270 this year. I’d love to up that to £1,200, giving me a nice round figure of £100 a month.

In 2022, Phoenix paid a dividend of 50.8p per share. Management has indicated a progressive policy, and a 5% hike would lift the full-year 2023 dividend to 53.34p per share. Based on that, I’d need to hold 2,250 shares to hit my income target.

Since I already hold 515, I need another 1,735 shares. At today’s price of 510p, that would cost me £8,849. I’m up for that but I have one worry.

The biggest dividend in the world won’t compensate if the share price keeps falling. If the dividend is cut or axed at some point, the investment case for Phoenix probably dies with it.

I’m worried I’m missing some lurking threat but I’ll take my chances and buy more. Passive income on this scale looks irresistible. Also, UK shares are undervalued. If they recover I may possibly get some capital growth on top too.

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.

Harvey Jones has positions in Legal & General Group Plc and 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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