Passive income’s a simple concept, yet it can be challenging to fully grasp. Imagine earning a second income without actively working for it? I won’t get that on the jobs market, but I can get it by investing in top FTSE 100 income shares like Phoenix Group Holdings (LSE: PHNX).
Once I invest my money, the dividends should flow into my trading account, year after year, with little effort on my part.
With luck, that income will grow as Phoenix increases shareholder payouts over time. By reinvesting my dividends, I acquire more shares which, in turn, pay additional dividends, creating a virtuous cycle. The longer I stay invested, the more time my money has to compound and grow.
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I plan to hold Phoenix shares for decades
While the concept’s appealing, it’s not without threats. First, the capital I invest is at risk. If the company’s strategy falters or it struggles financially, my shares could fall in value.
Second, dividends aren’t guaranteed. Companies need to generate enough cash to pay them, and this could pose a challenge for Phoenix. The company’s trailing dividend yield is a staggering 10.5%, forecast to hit 11% in 2025. That’s more than double the highest yields on cash or bonds. But is it sustainable?
Phoenix manages whole-of-life insurance policies, endowment plans, term assurance, annuities and pensions, investing more than £290bn on behalf of 12m customers. Brands include Standard Life, ReAssure and SunLife (although it’s considered offloading the latter).
The company has a strong track record of rewarding shareholders, increasing payouts in eight of the past 10 years.
Cash generation rose 5.8% to £950m in the first half of the current financial year. The board’s targeting up to £1.5bn for the full year. Yet it’s been a tough time for FTSE 100 financials since the pandemic. Phoenix’s share price has dropped 3.91% over the past year and 33.55% over five years, erasing much of the gains from dividends.
My dividends should compound and grow
At a price-to-earnings ratio of 15.35, the shares appear reasonably valued. But it’s not hard to envisage its shares trading sideways again in 2025, say, if interest rates remain high or the UK economy struggles.
I’ve £5,000 invested in Phoenix and I’m looking forward to receiving some juicy dividends next year, regardless of share price movements.
Now let’s consider a scenario, where I hold my shares for 30 years and the yield stayed at 11% (a big assumption, I know). If I reinvested every dividend, my £5,000 could be worth £114,461 by the end of that period.
That assumes the share price doesn’t rise at all. If it climbed at an average rate of 3% a year, my total return could hit a whopping £254,750. Not bad from an initial £5k.
Over three decades, anything can happen, which is why I diversify my investments across 15-20 FTSE 100 shares. Nonetheless, this calculation highlights the benefits of holding dividend stocks for the long term. I’m sticking with Phoenix and hope to bag that massive second income both through the ups and the downs of the shares.
