When hunting down the best income stocks, a lot of investors are tempted by the promise of high yields. Often, these generous payouts aren’t sustained, resulting in shareholders being lured into a trap. But every once in a while, an exception emerges. And investors get the rare chance to lock in both a high payout and a long track record of dividend hiking activity.
One such example of this could be Phoenix Group Holdings (LSE:PHNX). The insurance giant offers an impressive 8.6% yield right now, comfortably covered by expanding operating cash flows that have led to a decade of payout hikes.
So is now the time to consider adding this income stock to a portfolio?
Inspecting the opportunity
As a quick crash course, Phoenix is an evolving life insurance enterprise. Historically, it specialised in finding and buying closed books of in-force life insurance and pension policies, letting them run to generate a predictable cash flow. But in more recent years, it’s shifted its core strategy to become a more complete insurance enterprise with a diverse collection of pension and annuity products.
While this move introduced a lot of execution and competitive risks, so far, Phoenix seems to have risen to the challenge, delivering solid financial performance that has continued to support dividend growth.
By timing the transition with a period of rising interest rates, Phoenix has enjoyed capital momentum that has continued into 2025.
In turn, operating cash flows have expanded by 9% to £705m across the first half of the year, more than enough to cover the £274m in dividends paid. And with a strong annuities pipeline, analysts continue to be optimistic for larger shareholder rewards over the next two years.
What could go wrong?
While Phoenix is performing admirably today, some notable macroeconomic risk factors could interrupt the process. Higher interest rates have been a terrific boon. But with the Bank of England starting to ease its monetary policy by cutting rates, the gravy train seems to be slowing.
Consequently, there are rising concerns of tougher comparables on the horizon for both revenue and, more importantly, cash flow.
To management’s credit, efforts to deliver cost savings and reduce balance sheet leverage are expected to offset some of the impact of looming headwinds. But whether that will be sufficient to maintain the dividend hiking streak remains a primary source of uncertainty.
The bottom line
All things considered, Phoenix Group appears to be well-positioned today. At a forward price-to-earnings ratio of 9.4, the income stock doesn’t trade for a demanding valuation. But much like its substantial dividend yield, this is a reflection of the macroeconomic risk attached to this enterprise.
Such opportunities are always worth investigating. But investors will have to consider carefully whether the high yield is worth the macro risks. Personally, I’m looking at other income stocks for my portfolio.
