Phoenix (LSE:PHNX) shares have been volatile lately, dropping 7% on 8 September after a poorly received set of first-half results.
They’re still up 14% over one year and 21% over two, yet long-term investors might feel underwhelmed. The Phoenix Group Holdings share price trades at similar levels to a decade ago. That’s disappointing. The big consolation is that they offer one of the highest yields on the FTSE 100, with a decent record of dividend growth too.
Today, the stock offers an eye-popping trailing yield of 8.38%. The shares go ex-dividend on 25 September. Anyone who holds before that date will get an interim payment of 27.35p per share, due to land in trading accounts on 30 October.
Why the FTSE 100 stock stumbled
Last week’s results looked strong at first glance, but the market still wiped more than £400m off the group’s valuation. Operating cash generation came in at £705m, which beat expectations, but total cash generation missed by £22m.
The board still hiked the interim dividend by 2.6%, which suggested the income outlook is fine. As does the group’s high 175% solvency ratio. But investors remain concerned. I thought the market reaction was a bit overdone. Now I’m thinking of taking advantage of the dip to buy more.
Counting my income
I currently hold 871 Phoenix shares in my Self-Invested Personal Pension (SIPP), which means I’ll collect £238.22 on 30 October. I have around £2,000 of cash in my SIPP. With the stock at 644.5p, that would buy me another 310 more shares, generating £84.78 in fresh income. That would give me £323 next month, which I’d automatically reinvest to buy even more Phoenix shares.
Because Phoenix pays dividends twice a year, I could be looking at roughly £650 of annual income, with the potential for growth of around 2% a year if the board keeps raising payouts. Any share price growth would be a bonus.
This is why I’m tempted to top up my stake. For income-focused investors, the appeal of high-yielding companies is obvious, and Phoenix fits squarely into that camp.
Balancing the risks
There are dangers. September and October are often rocky months for markets. Turbulence could hit the value of its £295.1bn of assets under administration, and the share price.
Phoenix operates in a mature industry, where growth opportunities are limited, and has to hunt down new sources of growth to keep generating the cash it needs to pay the dividend. Another risk is that if inflation and interest rates stay higher for longer, that gives income seekers a decent return on no-risk cash or bonds. As a result, they are less likely to take a punt on stocks like Phoenix.
When a share goes ex-dividend, its price usually falls to reflect the cash being handed back to investors. Next week, the drop is expected to be around 4.16%. That’s the trade-off with high-yielding stocks: generous income often comes at the expense of capital growth.
I still think the recent dip has created an opportunity, which is why I’m strongly considering adding to my holding. Other income hunters might also consider buying, as long as they understand the potential risks rather than being dazzled by the dizzying yield.
