The Motley Fool

£1k to invest in an ISA? I’d buy this FTSE 100 stock yielding almost 7%

Got £1,000 to invest? It’s not big money but you’ve worked hard to earn it, and you want it to grow safely over time. Here’s one company you might want to buy and hold for years.

There are a lot of attractively-priced dividend stocks on the FTSE 100 at the moment, some yielding as much as 8% or 9%. The stock I’m looking at here yields almost 7% and looks like one of the more solid income plays on the index.

Phoenix Holdings

Phoenix Group Holdings (LSE: PHNX) isn’t the most exciting company, but therein lies its appeal. It is a closed life assurance fund consolidator, which means it spends its time buying up ‘closed’ life and pension funds, which it then continues to run on behalf of policyholders.

For most asset managers, the excitement lies in launching new products and attracting new customers, and they can neglect legacy funds that are closed to new customers, which are often managed by a company’s lesser lights. Phoenix doesn’t have that problem. Closed funds are its entire business, which means its focus is entirely on improving their performance, without being distracted by the need to win new customers.

That doesn’t mean it can’t expand. It continues to buy up more closed funds, recently acquiring Standard Life Assurance Limited. The group now has a market cap of £5bn and boasts around 10m policyholders, and £245bn of assets. Once having brought in new business, it can then apply synergies, cutting costs to run its policies more efficiently.

Back from the ashes

This is a conservatively run business by necessity, customers need to trust that Phoenix will not take undue risks with their life savings. I wouldn’t get too excited about the prospects of share price growth (there hasn’t been so much of that lately) as this stock is all about the income. Currently, it yields 6.7%, and at that rate you will double your money in 11 years, even if the share price doesn’t move at all.

Phoenix is looking to generate around £600m to £700m of cash for the 2019 full year, which it needs to keep those dividends flowing, and look strong with a Solvency II surplus of £3bn and a shareholder capital coverage ratio of 160%. One concern is that earnings forecasts are weak, with City analysts predicting a 15% drop this year, and 7% next. 

Phoenix may take a hit from the long-term decline in final salary schemes, but it is picking up new business from auto-enrolment workplace pensions and annuities. Although it suffered a minor blow last year when it was forced to scrap extra penalties on customers accessing pension pots under £5,000, a move that will cost it £68m a year.

A slight quibble

If the share price is unlikely to go gangbusters, you don’t want to overpay for it. Currently, Phoenix trades at 12.7 times earnings, which gives you a nice little discount. The price-to-revenue ratio is a modest 0.7. However, at 692p, the stock is only just below its 735p year-high. Over the last year, it has fallen as low as 537p.

I’d therefore keep track of this one for now, and dive in if the share price comes off a bit. That way you should get an even higher yield. Others don’t share my patience, Roland Head would buy it today.

High-Yield Hidden Star?

Discover the name of a Top Income Share with a juicy 7% forecast dividend yield that has got our Motley Fool UK analyst champing at the bit!

Find out why he thinks “the stock’s current weakness may offer us the chance to buy a proven dividend performer at what could be a bargain price”.

Click here to claim your copy of this special report now — free of charge!

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.