I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn’t worry Harvey Jones. He loves their 10%+ yield and hopes to get some solid growth soon too.

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It’s hard to ignore Phoenix Group (LSE: PHNX) shares as they offer the highest passive income stream on the entire FTSE 100 with a trailing yield of 10.42%.

Telecoms giant Vodafone Group appears to pay more income with a yield of 10.87%, but don’t be fooled. It will slash shareholder payouts in half for the year to March 2025.

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This highlights a recurrent problem with big yielders like these two. Typically, those sky-high yields are down to a falling share price. Yields are calculated by dividing the dividend per share by the share price, so if the share price slides, the yield automatically climbs.

Given that struggling companies often can’t maintain generous shareholder payouts, a high yield can ring alarm bells.

Can the ultra-high dividend survive?

The Phoenix Group Holdings share price is up a modest 5.14% over 12 months, but over five years it’s down 27.86%. Despite this, I believe its dividends are sustainable and should grow steadily over time.

Created with Highcharts 11.4.3Phoenix Group Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

On 15 September, the financial services group reported a 15% increase in first-half adjusted operating profits and reiterated both earnings and cash generation targets. Total cash generated climbed 5.79% to £950m. The board is now aiming to hit the top end of its £1.4bn to £1.5bn range in full-year 2024. Markets now forecast the yield will edge up to 10.9% in 2025.

Currently, 14 analysts offer one-year share price forecasts for Phoenix Group. They’ve set a median price target of 576p. This demonstrates cautious optimism, as it would mark a 13.18% increase from today.

If that forecast came true I’d be looking at a total return of almost 25% next year. I’d be happy with that. I don’t buy FTSE 100 dividend stocks like Phoenix with the aim of making a fast buck. My hope is that the share price rises over periods measured in decades, while my reinvested dividends also compound and grow.

It’s a brilliant dividend stock

Yet that median analyst forecast is made up of a wide range of views. While five of the 14 brokers label Phoenix a Strong Buy, four rate it a Strong Sell. The most optimistic share price prediction is 680p. That’s up more than 33% from today’s 508p, so I hope it’s right. But the biggest pessimist predicts the shares will drop 5.5% to 480p.

How Phoenix does in practice partly depends on interest rates. Its shares have dipped 9.08% in the last three months as investors now expect rates to stay higher for longer. That means savers can get a decent yield from low-risk cash or bonds, and are less likely to risk their capital on stocks like this one.

Interest rate cuts would boost the FTSE 100 generally and financial stocks in particular. We may have to be patient though.

Trading at 15.46 times earnings Phoenix shares look reasonable value. Even if the recovery takes time, I’m more than happy to wait for Phoenix to rise. And while I’ll do, I’ll reinvest every dividend it pays me. 

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Harvey Jones has positions in Phoenix Group Plc. 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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