The FTSE 100 contains many companies that pay high dividends. These can be used to create wealth that can be passed on down through the generations.
One such stock that I bought for precisely this purpose is Phoenix Group Holdings (LSE: PHNX).
Unknown to many I think it that it operates some of the biggest brands in the UK’s insurance business, including Standard Life. It is also its largest long-term savings and retirement business, with £283bn of assets under administration and 12 million customers.
Steady dividend increases
A risk in the shares is a new financial crisis of the sort seen in March/April 2023. This was caused by the failure of Silicon Valley Bank and then Credit Suisse. It led to a fall in the prices of many financial sector shares. Another is any new rise in inflation that might act as brake on new business generation.
However, in 2023, it paid a total dividend of 52.65p a share. At the current price of £5.41, this provides an annual yield of 9.7%. By comparison, the current average payout on the FTSE 100 is just 3.6%.
Reassuringly for me, the firm has steadily been increasing its dividend over the past few years.
Working backwards each year from 2022, it paid 50.8p, 48.9p, 47.5p, and 46.8p. These provided respective yields at the time of 8.3%, 7.4%, 6.8%, and 6.2%.
How much money can it generate?
£11,000 (the average UK savings amount) invested in Phoenix Group shares yielding 9.7% would make £1,067 in the first year. Assuming the yield remains the same, it would make the same amount next year.
After 10 years of this, there would be an extra £11,067 to add to the initial £11,000 investment. After 30 years, the additional figure would have risen to £32,010.
This exceeds what a standard UK bank account would generate. But it does not qualify as generational wealth in my book.
How can the returns be turbo-charged?
To move a step closer to that, the dividends paid out each year can be used to buy more of the shares. This is known as ‘dividend compounding’.
By doing this, the £11,000 would generate an extra £17,904 after 10 years, rather than £11,067. This again assumes the same 9.7% average yield over the period. But this can go down as well as up, depending on changes in share price and dividend payments each year.
Nonetheless, over 30 years there would be an additional £188,576 instead of £32,010! The total investment pot would be worth £199,576 by that point, paying £19,359 a year in dividends.
The buying power of the money would be less by that time, of course. However, it looks a solid foundation to me for the creation of significant wealth that can be passed down through the generations.
