I’ve been searching high and low over the past 12 months for the highest-yielding UK shares for my passive income portfolio. While I’ve had some success in my mission, one stock remains the top earner in my portfolio.
With strong growth and a reliable 9% yield, I’m yet to find a stock that beats Phoenix Group (LSE: PHNX). It’s one of the highest-yielding stocks on the FTSE 100 and is up 20% so far this year.
The UK insurance sector in general is doing well, with both Aviva and Admiral Group also posting 20%+ gains. However, neither offers such a high yield. Legal & General, meanwhile, has a comparatively high yield but has suffered weak price performance this year.
Dedication to shareholder returns
Despite a rocky economic climate rattled by numerous geopolitical events recently, Phoenix remains dedicated to delivering returns to shareholders. This makes it a compelling stock to consider for income-focused investors. As a stalwart in the UK insurance sector, the company has long offered an attractive dividend policy.
Since introducing dividends in 2009, they’ve increased annually at an average rate of 2.91%. It doesn’t quite have the long-running and impressive track record of Legal & General, but it seems to be heading that way.
However, it’s essential to also consider the potential risks inherent in its financial structure and market dynamics.
Troubling times
In 2024, the group reported a net loss of £1.12bn, a stark contrast to the £34m profit in the previous year. This downturn was attributed to factors such as market volatility and regulatory changes impacting the insurance industry.
Moreover, the company’s dividend payout ratio is -48.25% because earnings are negative and don’t cover dividend payouts. While it has substantial cash reserves to mitigate any immediate concerns, it may struggle to sustain dividends if performance doesn’t improve.
The broader economic environment also poses challenges. The UK’s insurance sector is experiencing a deceleration in premium income growth, with forecasts predicting a decline from 5.8% in 2024 to 4.4% in 2025 for life insurance premiums. Such trends could impact the company’s revenue streams and profitability.
One the plus side, its operating cash generation reached £1.4bn in 2024, surpassing its 2026 target two years ahead of schedule. This goes a long way to supporting its dividend policy and providing a buffer against economic uncertainties.
Strategic business developments
A key attraction for me is promising number of business developments fuelling the insurer’s growth strategy.
Despite posting a £1.12bn loss in 2024, it enjoyed a 31% increase in adjusted operating profit of £825m, driven by a 34% rise in retail gross inflows to £5.1bn. Such growth underscores the effectiveness of its three-year strategy focused on sustainable and profitable expansion in both Pensions & Savings and Retirement Solutions segments.
Even more impressive is its proactive approach to debt management. It paid off £250m over the past year, maintaining a stable Solvency II leverage ratio of 36%. Plans are in place to reduce this ratio to approximately 30% by the end of 2026, reflecting a prudent capital allocation strategy.
Overall, the above factors make me feel confident that Phoenix Group will continue leading my passive income strategy. As such, I believe that investors with a similar goal would be wise to consider it.
