Before I move on to my bargain-basement FTSE 100 stock, I’ll mention the weakness in the UK stock market over recent months. As I write on Friday afternoon, the UK’s elite index is down 3.7% over the past month and has lost 6.5% of its value over six months.
Meanwhile, the US S&P 500 index is also down 3.7% in a month, but is up 2.7% over six months. The figures for the tech-heavy Nasdaq Composite index are -3.2% and +8.1%, respectively.
The FTSE 100 is flagging
Indeed, the Footsie is at the same level today as in April 2019 — more than 4½ years ago. Over five full years, it has risen by a mere 6.8% (all figures exclude dividends).
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From these figures, it’s easy to understand why many global (and local) investors have shunned UK shares in favour of more exciting foreign stocks. But these falls have left the UK index looking very cheap versus its global rivals.
Right now, the FTSE 100 trades on a lowly multiple of just 11 times earnings, producing an earnings yield of 9.1%. It also offers a dividend yield of around 4% a year, versus 1.6% for the S&P 500. Hence, I consider the UK stock market to be widely undervalued, both in historical and geographical terms.
This value share keeps getting cheaper
One unloved, unwanted, and undervalued Footsie share that keeps cropping up is Phoenix Group Holdings (LSE: PHNX). For the record, my wife and I bought shares in this firm for 544.4p each in August.
Financial firm Phoenix Group buys, manages, and runs unwanted pension and insurance funds. By squeezing out cost savings by consolidating financial assets, it seeks to generate attractive income for patient shareholders.
At present, Phoenix Group shares trade at 447.5p, valuing this business at £4.5bn — making it a FTSE 100 lightweight. But in two months, we have a paper loss of 17.8% of our initial investment — hardly a great start.
However, we bought this stock for the same reason as many fund managers own it: market-beating dividends. And as Phoenix Group’s share price slides, its cash yield soars. Today, this stands at a whopping 11.6% a year, making this the highest-yielding FTSE 100 share.
High dividends can be dangerous
After nearly four decades of investing, I know that one of two things usually happens to ultra-high-yielding shares. Either A) the share price recovers and the dividend yield goes back down. Or B) the dividend is cut and the stock price dives.
From bitter experience, I know that I much prefer outcome A to outcome B. For years, Phoenix Group has paid out ever-rising dividends, which the board plans to keep doing for at least the next two years.
Alas, Mr Market has failed to notice, with the stock hitting a 52-week low of 445.7p on Friday afternoon (20 October). Over one year, the share price is down 17.1%, plus it has dropped by 24.3% over five years. But adding back hefty dividends lifts this stock well above the FTSE 100’s total return over five years.
Finally, we will receive the interim dividend of 26p a share — 4.8% of our purchase price — on Monday (23 October), reducing our loss. That helps to soften our capital loss — one of the key upsides of dividend investing!
