At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this one could come good in the long term.

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I always think one thing when I get a dividend share payout. No matter what happens to the share price, they can’t take the cash back.

If I buy shares with an 11% yield, I could have my money back in a bit over nine years. And then the share price itself is a bonus.

You don’t get that with these ‘jam tomorrow’ growth stock hopefuls.

Dividend cuts?

That’s a bit of an ideal, I know, and it might not work out quite like that. Future dividends are not guaranteed, and can be cut when the cash isn’t there.

Vodafone, for example, offers a forecast dividend yield of 10.9%. But the telecoms giant plans to slash it in half next year, as as it refocuses its strategy.

The 11% I’m looking at here is from Phoenix Group Holdings (LSE: PHNX), which acquires and manages closed insurance and pension funds.

The yield as a percent is this good partly because the Phoenix share price has fallen 30% in the past five years.

Dividend growth

Still, while the share price weakness might flatter the yield, the dividend has been growing steadily in cash terms.

And that should continue, according to the firm’s FY results update in March, when CEO Andy Briggs announced a “new progressive and sustainable dividend policy.”

We didn’t get much in the way of detail, but the board did say it “will continue to prioritise the sustainability of our dividend over the very long term.

Will it happen?

Now, none of this is any kind of guarantee. And at the first sign of any new financial pressures, this could all change and the dividend could be cut at the drop of a hat.

Future plans depend on being able to grow assets, which in turn should boost earnings and cash flow. Right now, the company is bullish.

But financial firms were optimistic before the 2008 banking crash. And again before Brexit, and before Covid…

So anyone considering buying Phoenix Group shares now should be sure they’re happy with all the risks.

Reinvest

And, to make the most of a top dividend stock like this, we need to add more risk. It means buying new shares with the dividend cash each year, which can seriously boost the power of compounding.

Remember when I said that dividends can’t be taken back once they’re paid? Well, we lose that safety when we plough the cash back into new shares… which can fall.

Still, if we take that approach with Phoenix Group, the dividend yield stays at 11%, and we keep reinvesting it?

Well, every £1,000 we start with today could turn into £8,000 in 20 years. Or a stunning £22,000 in 30 years.

Diversify

I don’t really expect to get that return. For one thing, I’d hold a diversified portfolio and that would bring down my average return.

But I still rate high-yield dividend stocks like this as my best chance for building long-term wealth.

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 Vodafone Group Public. 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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