A 10.3% yield but down 12%! Time for me to buy more of this hidden FTSE 100 gem?

The FTSE 100 giant savings and retirement business delivers one of the highest yields in the index, which can generate huge passive income over time.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100’s Phoenix Group Holdings (LSE: PHNX) is not a high-profile name among small investors, I think. It was not to me either, until my stock screener started flashing its name in March 2023.

At that point, the failure of Silicon Valley Bank prompted many financial stocks to fall on fears of a new financial crisis. Given that a stock’s yield rises as its price falls, Phoenix Group’s yield had shot up to well over 10%. By comparison, the average yield of the FTSE 100 at the time was 3.7%.

Created with Highcharts 11.4.3Phoenix Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL6 Jan 20206 Jan 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '2520212021202220222023202320242024www.fool.co.uk

I did a bit of digging and was amazed to find it is the UK’s largest long-term savings/retirement business, with 12m customers! I bought the stock at that point and have been regularly adding to it ever since.

Should you invest £1,000 in Coca-cola right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Coca-cola made the list?

See the 6 stocks

How much dividend income can it generate?

Phoenix Group yields 10.3% (2023’s 52.65p total dividend divided by the current £5.10 share price).

So, investors considering a £9,000 investment in the firm – the same as mine initially – would make £927 in dividends in the first year. On the same average yield (which is not guaranteed), this would rise to £9,270 after 10 years and to £27,810 after 30 years.

This is clearly a lot better than can be made from a standard UK savings account. But it could be even better than that, using the common investment method of ‘dividend compounding’. This simply involves using the dividends paid by a stock to buy more of it.

The ‘magic’ of dividend compounding

Utilising this method on the same average yield would generate £16,099 in dividends after 10 years rather than £9,270. And after 30 years on the same basis, this would have risen to £186,203, not £27,810!

Adding in the original £9,000 investment, the total Phoenix Group holding would be worth £195,203. And if the 10.3% yield were still in place, this would generate £20,106 a year in dividend income, or £1,676 a month!

That said, consensus analysts’ estimates are that the dividends will increase to 55.2p and 56.8p respectively in 2025 and 2026. On the current share price, this would give yields of 10.8% and 11.1%.

Are these high payouts sustainable?

Ultimately, a firm’s dividends and share price are driven by sustained growth in earnings. For Phoenix Group, analysts forecast that its earnings will increase by a stunning 75.1% annually this year and next.

Like all firms, there are risks to its business outlook. A key one for Phoenix Group is a significant resurgence in UK inflation, which could fuel a new cost-of-living crisis. This could cause existing customers to cancel policies and deter new business as well.

Nevertheless, the firm has built up massive reserves in recent years. Its H1 2024 results showed total cash generation of £950m in the period. And it is confident it will deliver at the top-end of its £1.4bn-£1.5bn target range for full-year 2024.

Over the same period, its IFRS adjusted operating profit grew 15% to £360m. This was driven by strong expansion in its Pensions and Savings and Retirement Solutions businesses.

Will I buy more?

Given the strong earnings growth forecasts, I will be buying more stock very soon. This should enable it to increase dividends, and may also lead to a share price boost, although again, that is not guaranteed.

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

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.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Investing Articles

US trade tariffs: what they could mean for UK shares like Ashtead, Compass Group, and Experian

US trade tariffs continue to rock global markets, and the UK is no exception. Our writer considers how a new…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have been on fire since April 2020. Part of this is the result of pandemic restrictions lifting, but…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

£10,000 invested in Tesla stock at its peak in 2024 is now worth…

Over the last few months, Tesla stock has lost nearly half its value. Here, Edward Sheldon explores a few takeaways…

Read more »

Investing Articles

Is the S&P 500 heading for an epic stock market crash?

Our writer shares his thoughts on a very crazy time for the S&P 500 and the wider stock market. How…

Read more »