This overlooked FTSE income share yields 10.4% and could fly in the next bull market!

Harvey Jones usually runs for cover when he sees a FTSE 100 income share with a double-digit yield. So why does he rate Phoenix Group Holdings so highly?

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Whenever I spot a top FTSE 100 income stock with a double-digit yield, I reach from my crash helmet. How can a company afford to pay so much cash to shareholders year after year? The answer is, they usually don’t.

FTSE 100 blue-chips Persimmon, Rio Tinto and Vodafone have all slashed their dividends in recent years, after the yields got out of hand.

Given my concerns, why on earth did I buy shares insurance conglomerate Phoenix Group Holdings (LSE: PHNX) on two occasions last year?

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Can the Phoenix Group share price finally fly?

It’s a funny stock, Phoenix. It seemed to rise from nowhere. The name doesn’t ring bells, although one or two of its brands do, notably Standard Life and SunLife

Yet today, it’s able to call itself “the UK’s largest long-term savings and retirement business”, based on its 12m customers and £290bn of assets under management. Although given that Legal & General Group manages a whopping £1.2trn, I think there’s a discussion to be had over size. I’ll stay out of that.

The last few years have been tough on FTSE financials, which have been knocked by stock market volatility and high interest rates. The Phoenix share price has dropped 33% over five years. It’s flat over 12 months. Which largely explains why it offers the highest yield on the FTSE 100, at 10.34%.

Legal & General’s in a similar position. Its shares have fallen 24% over three years. The trailing yield’s 8.66%. The whole sector’s due a re-rating. I think it will come when interest rates fall.

As investors get lower yields from cash and bonds, they’ll be more willing to chance their capital on shares like Phoenix to secure a higher rate of income. Having said that, there’s no guarantee interest rates will fall. They’re proving sticky today.

Phoenix generates substantial cash flows from its established portfolio of life insurance policies, which is vital to funding shareholder payouts. It generated £950m of cash in the first half of 2024, and is on track to hit £1.4bn-£1.5bn over the full year. 

Yet Phoenix also reported a £88m IFRS loss after tax in 2023, which followed an even bigger £2.7bn loss in 2022. The company attributed this to market volatility, which hit its hedging positions.

It’s hard to look past that dividend

The board labels its dividend policy “progressive and sustainable” and analysts seem to believe in it. Phoenix is forecast to yield 10.7% this year, and 11% in 2026. If that continues, I’d double my money in less than seven years from dividends alone.

I’m sticking with my Phoenix shares but it’s odd holding a stock that looks like an unmissable bargain but keeps going nowhere. Why isn’t everybody snapping up this opportunity?

The shares don’t even look expensive, trading at 15.33 times trailing earnings. Am I missing something? It’s possible.

But I think its failure to grow is down to inflation and interest rates. When they fall, I’d expect the Phoenix share price to spread its wings. I may have to be patient, but while I wait, I’ll reinvest every penny of that super-generous yield.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p 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 10%, 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

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.

Harvey Jones has positions in Legal & General Group Plc and 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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