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%.
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.
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.
