FTSE 100 insurance and investment giant Phoenix Group Holdings (LSE: PHNX) paid a dividend of 54p last year. On the current share price of £6.83, this gives a dividend yield of 7.9%.
By comparison, the current average FTSE 100 dividend yield is just 3.4%. And the ‘risk-free rate’ (the 10-year UK government bond yield) is 4.7%.
The average UK savings amount is presently £11,000, so half of this would buy 805 shares in Phoenix Group. On the current 7.9% yield, these would generate £435 in first-year dividends. This would rise to £4,350 after 10 years on the same yield and to £13,050 after 30 years on the same basis.
Supercharging returns with dividend compounding
That said, the dividend payouts could be turbo-boosted through the use of dividend compounding (the standard investment practice in which dividends are reinvested back into the stock that paid them).
It is a similar idea to leaving interest to accrue in a regular bank savings account. But the effect on the overall dividend returns over time can be spectacular.
Specifically here, the same 805 shares on the same 7.9% average yield would make £6,587 in dividends after 10 years, not £4,350. And after 30 years of dividend compounding, this would increase to £52,880, rather than £13,050!
By then, the total value of the Phoenix Group holding would be £58,380, and this would generate a yearly passive income of £4,612.
Passive income is money made with little effort, as with dividends from stocks.
The dividend yield’s forecast to go even higher
A share’s dividend yield moves in the opposite direction to its price, provided the annual dividend stays constant. Consequently, as Phoenix Group’s share price has risen over the past year, its dividend yield has declined.
However, it has also increased its dividend every year since 2020. In fact, it has gone up 14% over that period – from 47.5p in 2020 to 54p in 2024.
Moreover, consensus analysts’ forecasts are that this trend will continue. Specifically, the projections are for the dividend to rise to 55.8p this year, 57.4p in 2026, and 58.9p in 2027.
These would generate respective yields on the current share price of 8.2%, 8.4%, and 8.6%.
Of course, it is earnings that ultimately power any firm’s dividends (and share price) higher over the long term.
A risk to Phoenix Group’s is any further surge in the cost of living, which may cause investors to close their accounts.However, consensus analysts’ forecasts are that Phoenix Group’s earnings will increase by a stunning 96.3% every year to end-2027!
My investment view
I bought shares in the firm in the aftermath of March 2023’s mini-financial crisis. This followed the failure of Silicon Valley Bank, which triggered fears of a new financial sector meltdown.
Since then, the stock has been a cornerstone of my passive income portfolio. It has delivered consistently high dividend payments and a big share price gain to boot.
I believe its stellar earnings growth will enable it to keep raising dividends as it has done in the previous few years. I think it will do the same for its share price. Given these factors, I will buy more of the shares as soon as possible.
