Phoenix Group (LSE:PHNX) has the biggest dividend yield of all the stocks in my Stocks and Shares ISA, standing at a whopping 9.1%. In fact, it has the second biggest yield on the FTSE 100, only behind global investment manager M&G.
The thing is, Phoenix Group doesn’t offer much in the way of share price gains. In fact, the stock was pretty flat over five years until the US banking fiasco sent global financial stocks tanking in March.
Currently, I believe there’s some upside to the share price, primarily because of the unwarranted dip earlier this year, but I’m largely investing in Phoenix Group for the dividends.
The business model
Phoenix Group is the UK’s largest long-term savings and retirement business. And its longevity is underpinned by a tried and tested business model. Traditionally, Phoenix Group has focused on buying and managing closed investment and pensions schemes.
In total, the company has 14m policyholders. This grew considerably when management broadened the business by acquiring a wealth management arm Phoenix Wealth (formerly AXA Wealth), as well as the Standard Life brand name, SunLife and ReAssure, a few years ago.
Over the past year, growth has been slow but still positive. In 2022, adjusted operating profits grew to £1.24bn — beating estimates — and up from £1.23bn in 2021. Moving forward, chief executive Andy Briggs wants to see cash generation reach £1.5bn by 2025 — it’s not a business that’s happy to stand still.
The dividend
If I bought 3,558 shares today, it would cost me around £20,000. And in return, I’d receive around £1,800 a year in the form of dividends. That’s a very strong return.
But it’s worth remembering that dividends are by no means guaranteed. The dividend coverage ratio is something of a concern. According to Hargreaves Lansdown data, coverage has fallen from 1.93 in 2020, to 1.62 in 2021, and 1.6 in 2022. However, I’m comforted by the steadiness of the business and its ability to generate cash.
Normally, investors would consider a dividend coverage ratio in excess of two to be healthy. However personally, I make exceptions for established businesses that generate a steady flow of cash.
My verdict
The dividend coverage might not be as strong as it could be. However, I don’t anticipate the dividend being cut anytime soon. Cash generation is strong and the dividend payment was recently increased from 48.9p in 2021, to 50.8p in 2022.
Of course, there are concerns around the health of financial stocks at the moment, partially due to the turmoil we’ve experienced in stock and bond markets over the past 12 months. But this shouldn’t have an impact on Phoenix Group’s core customer-facing operations.
And finally, valuation. The company trades at just 6.8 times earnings. That’s half the index average. This is one of the reasons why I recently topped up my position. I don’t quite have 3,558 shares in Phoenix Group, but I’m increasing my holding in an effort to increase my dividend income.
