Got a small lump sum and fancy bagging an ultra-high income from a top UK dividend share? One of my favourites offers a yield of 7.78%, way above the returns on cash.
The FTSE 100 is breaking record highs, which can be a problem for income hunters. When share prices rise, yields fall. That’s purely down to the maths: yields are calculated by dividing the dividend per share by the share price. A rising share price automatically pulls the yield down, even if the payout is unchanged.
Phoenix shares are flying
That’s the case with Phoenix Group Holdings (LSE: PHNX). When I first bought it two years ago, the yield was nearer 10%. That was an extraordinary rate of income, providing it proved sustainable. I decided it was, and took the plunge.
Today the trailing yield is 7.78%. Still outstanding, but lower than before thanks to the stock climbing an impressive 25% over the past year. Investors are finally waking up to its growth potential as well as its chunky income stream. My total 12-month return is close to 35%.
That yield looks well supported, with full-year results (17 March) showing operating cash generation up 22% to £1.4bn, hitting a key target two years early. The final dividend was lifted 2.6% to 27.35p, taking the full-year payout to 54p.
Management aims to generate £5.1bn of cash over 2024-26, giving plenty of scope for future payouts. Still, the board has a record of holding or raising the dividend in nine of the past 11 years, with an average increase of 2.91% annually. That’s expected to slow to around 2% now.
UK income stocks bounce back
Phoenix’s progress hasn’t been achieved in isolation. International investors have rediscovered the appeal of UK equities, which trade on modest valuations, especially compared to the US market. Old-school income shares have also gained favour as central banks begin to cut interest rates, reducing the yield from bonds and cash. I’d expected this shift for some time, and it finally appears to be under way, even if sticky inflation slows the process.
Of course, there are risks. A major stock market downturn could knock the value of Phoenix’s assets, hitting sentiment. The group also needs to keep finding new sources of revenue to ensure future cash generation. Bulk annuities is a promising growth area, but competition is fierce.
Forecast total return
At today’s share price of 696.5p, £1,000 would buy an investor around 142 shares after charges. Analysts expect the dividend per share to hit 56p in 2025. If correct, that holding would generate £79.52 of income. That’s a modest amount but would roll up over time, especially if the investor bought more Phoenix shares later.
With a price-to-earnings ratio of 15.3, the stock looks fairly valued rather than cheap. Consensus broker forecasts suggest the share price could slip around 2% over the next year. Yet once dividends are factored in, investors would still be ahead. We’ll see. Forecast should always be taken likely. The real benefit comes over the longer term, as reinvested payouts compound and the share price hopefully grinds higher.
I think Phoenix is well worth considering for those who prioritise income over growth and are prepared to hold for years rather than months.
