In the low-interest-rate world we’re experiencing, I want to try and make my investments work harder. One way I can do this is by targeting high-dividend-yield stocks. In this way, I can achieve an income payout that’s higher than I could get with my money sitting in cash. Obviously this carries a higher risk and I need to be aware of this. Being happy with the risk/reward balance, here are two stocks I’d take a look at.
A cash cow
Phoenix Group (LSE:PHNX) is a large UK-based insurance group. It services 14m customers and is well established in its market. One of the appealing features of this industry in general is the high level of cash generated. Paying this out enables Phoenix to be classified as a high-dividend-yield stock.
At present, the yield sits at 6.47%. Reading through the 2020 report, it’s clear that the dividend policy is a key focus for the company. It shows how the dividend per share has grown in almost all of the past 10 years. Back in 2010, it stood at 32.2p a share. Now it’s at 47.5p.
As long as the business is functioning well, I’m confident Phoenix will remain a high-dividend-yield stock. The outlook does seem robust, with the business growing operating profit in 2020 to almost £1.2bn versus £810m in 2019.
One risk is that I don’t know how much of the company growth is organic. The company has grown in part through multiple acquisitions, most recently ReAssure during 2020. Taking on this book automatically generates revenue from existing clients. The risk to me going forward is that without further purchases, growth could stall.
Another high-dividend-yield stock
Next up is M&G (LSE:MNG). I wrote about the company back in February from an income perspective when the yield was almost 10%. It’s reduced now, as the share price has risen from around 190p to 237p. The higher share price has reduced the dividend yield to 7.67%.
Even with this, it’s still a high-dividend-yield stock. It operates as a savings and investment firm, again an area that offers good levels of liquidity. After all, M&G collects fees and commissions from the assets held under management (AUM). As long as performance is good, assets should increase and fees will follow.
I think the outlook for the company looks strong. AUM grew in 2020 to £367.2bn, up from £351.5bn the year before. However I do need to note that this rise is largely due to an acquisition during the year. Savings and asset management posted a net outflow of £6.6bn.
I think this was largely due to the market crash, and was a blip. Given the fact that we haven’t had another market crash since March 2020, I’d imagine inflows should tick higher throughout this year. This sensitivity to the broader stock market can be seen as both an opportunity and a risk.
Another risk I need to note is the fact that M&G is a relatively new independent company, being spun off from Prudential in 2019. Therefore it’s hard to put a fair value on what the stock is worth after only a limited trading history alone.
Overall, both high-dividend-yield stocks offer me the ability to hopefully pick up some good income.
