A 10.9% yield but down 14%! £11,000 in this FTSE dividend superstar could make me £26,716 in annual passive income

This insurance giant has one of the highest yields in any FTSE index, looks set for strong growth, and appears undervalued to me.

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FTSE insurer Phoenix Group Holdings (LSE: PHNX) has fallen around 14% from its 27 July 12-month traded high of £5.63.

Dividend yields move in the opposite direction to share prices. So this price fall means that the shares now return one of the highest payouts in any FTSE index.

How much can I make?

In 2023, the firm increased its dividend to 52.65p a share from 50.8p the year before. On the current share price of £4.85, this gives a yield of 10.9%.

So £11,000 (the average savings amount in the UK) invested at 10.9% would make £1,199 this year in dividend payments.

If the yield averaged the same over 10 years, the dividends would be £11,990 on top of the £11,000 investment.

Crucially, reinvesting the dividends paid back into the stock can turbocharge the overall returns. This is ‘dividend compounding’ and is the same idea as compound interest in a bank account.

If I did this, I would have an additional £19,953 instead of £11,990 after 10 years. It would mean £30,953 in total, paying £3,042 a year in dividends, or £254 a month.

Over 30 years on an average 10.9% yield, the investment pot would total £245,098, paying £26,716 a year, or £2,226 a month!

Are these high returns sustainable?

Growth in earnings and profits drives increases in a company’s share price and its dividends over time.

The main risk in the company, in my view, remains a deterioration in its strategies to hedge its capital position. This involves trading other assets with the intention of reducing the risk of adverse market movements on its capital.

However, its core business looks to me to be expanding strongly. In 2023, its Pension and Savings business grew 27% from 2022. New business net inflows soared by 72%, to £6.7bn.

The company is now targeting £900m in IFRS-adjusted operating profit by the end of 2026.

Consensus analysts’ expectations are that its earnings will grow by 38.9% a year to end-2026. Earnings per share are forecast to increase by 52.5% a year to that point.

Undervalued as well?

To minimise the chance of my dividends being erased by sustained share price falls, I always buy stocks I think are undervalued.

One key measurement to ascertain whether a share is undervalued is the price-to-book (P/B) ratio.  Phoenix Group is currently trading at a P/B of just 1.6. This compares to the average P/B of its peer group of 3.4, so it looks a bargain on this basis.

The same applies to its price-to-sales (P/S) valuation of only 0.2 against a peer group average of 1.4.

Given their extremely high yield, apparent undervaluation, and growth prospects, I will be increasing my existing stake in Phoenix Group Holdings 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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