Phoenix Group Holdings (LSE: PHNX) is one of my top candidates for generating long-term passive income.
And though its share price has gained nearly 20% in the past 12 months, it still has a forecast dividend yield of 8.4% for the current year. That’s something that could contribute to long-term returns from the FTSE 100 — which have averaged an annual 6.9% over the past 20 years.
But before I work out the income we might get from it, I need to look at the company itself.
Insurance pros and cons
Phoenix is in the insurance sector. Specifically, it specialises in acquiring and managing closed funds, like life and pension funds.
On the one hand, I think that should make it a bit safer than companies operating in riskier insurance categories. But on the other, it can provide a limit on future business growth. And Phoenix has been looking at ways to expand its business focus.
The insurance business is double-edged in another way. Earnings can be a bit volatile, and the Phoenix Group share price has had an erratic five years. But that does give us a chance to buy cheaper when it’s down, and aim for better long-term dividend yields.
Dividends can be erratic too. In fact, Phoenix cut its dividend in 2016 and again in 2018. I do think it has the potential to provide healthy long-term dividend income. But this reminds us dividends are never guaranteed, and stresses the need for diversification.
Some numbers
So, let’s run some numbers and see where they might lead.
For the sake of example, I’m going with a constant share price and dividend yield. That’s unlikely to happen in real life for one individual stock. But I do see an average 8.4% annual return as a realistic long-term target to aim for with a diversified portfolio.
And I’ll assume we invest all the dividend cash into more shares each year.
Someone who invests £500 per month will have stumped up a total of £60,000 over 10 years. And our compounded 8.4% annual return could boost that to £92,500 after 10 years. Thats enough to pay an annual passive income of nearly £7,800.
Push it to 20 years, and we could be looking at a few pounds short of £300,000, which could be paying £25,000 per year passive income. So, twice the timescale can mean three times the capital build-up, and three times the resulting income.
Practicalities
Most stock market investors use a combination of a Stocks and Shares ISA and a SIPP. They each have different tax advantages, which individuals need to assess according to their needs. But what an ISA means is that the sum we build up, and the passive income we take from it, attract no tax at all — no matter how much we can achieve.
As part of a diversified long-term passive income portfolio, I reckon Phoenix Group is one investors really should consider.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
