With the right dividend stocks, an investment portfolio can start generating a substantial and reliable passive income. And for those luckly enough to have £100,000 sitting in the bank, this goal can be achieved overnight.
For example, looking at the FTSE 100 today, investors can immediately start earning a 2.87% yield from the UK’s largest and most mature businesses. That’s not bad, but for stock pickers, the potential rewards are even more lucrative.
Consider Phoenix Group Holdings (LSE:PHNX). Right now, the rising British insurance enterprise is paying a dividend yield of 7.42%, unlocking a £7,420 passive income for anyone who invests £100k. And with a nine-year track record of hiking shareholder payouts, this passive income could grow even larger. So is this a no-brainer?
Inspecting Phoenix’s yield
Dividend yields rarely stretch beyond 6% without some form of trouble brewing or concerns about sustainability. Yet, when looking at Phoenix, neither seems to be the case.
The stock’s charged upward over 40% during the last 12 months. And at the same time, when stripping out all the complex non-cash accounting of mark-to-market securities and amortisation, the business is generating more than enough free cash flow to comfortably cover the generous shareholder payouts.
What’s more, its highly cash-generative business model’s helping management steadily chip away at its outstanding debts. The result has been steadily declining leverage, improved regulatory solvency ratios, and an upward trajectory in capital surplus.
So far, it sounds like Phoenix is indeed a terrific dividend stock to consider buying.
What’s the catch?
Despite having strong fundamentals, there are some tangible risks surrounding this business, likely explaining why many investors haven’t taken advantage of the payout.
The most obvious is just complexity. Phoenix operates through 25 regulated subsidiaries, including Phoenix Life, Standard Life, SunLife, and ReAssure. As a consequence, it can be exceptionally challenging to look under the hood and understand exactly what’s going on. And this lack of transparency creates uncertainty.
At the same time, new regulations and potential changes to solvency requirements are only adding to the UK insurance sector’s complexity. Meanwhile, steady interest rate cuts by the Bank of England are also having knock-on effects on the performance of Phoenix’s investments, pressuring dividend coverage.
So where does all this leave investors?
What’s the verdict
As dividend stocks go, Phoenix is exceptionally complicated. However, complex businesses are often the ones being overlooked by most investors. And historically, that’s led to some pretty terrific buying opportunities hiding in plain sight.
That’s why I think investors may want to consider taking the time to dissect this dividend stock’s intricate operations. Even more so given there’s a potentially rare, lucrative, and reliable 7.42% yield on the table. And this isn’t the only exciting income opportunity I’ve got my eye on right now.
