If I invested and enjoyed a 10% dividend yield, I’d recover my starting stake in less than eight years. I could sell my shares then for more returns or let the payments keep rolling in. No wonder the FTSE 100‘s double-digit dividends are popular.
However, a gigantic yield is sometimes a red flag. Yields only go so high when investors are treading cautiously, so underlying issues are commonplace with such stocks. In fact, the Footsie now boasts a few massive dividends I wouldn’t touch with a 20-foot bargepole.
But among the big-paying stocks, gems do exist. And the Phoenix Group (LSE: PHNX) 10.05% dividend yield might be one of those rare entities.
Buy today
Sector weakness has pushed the yield to an unnaturally high level. But I think the market has priced this one wrong and I’m not sure how much longer the yield will stay high. I’d buy in today if I had the spare cash. Here’s why.
To start with, the Phoenix dividend has been rising for years with seven consecutive increases. Perhaps tellingly, the dividend increased throughout the pandemic when other long-running dividends were being cancelled left, right and centre.
This solid track record is paired with a 10-year growth rate of 2.53%, so the dividends have been growing comfortably ahead of inflation over the period.
No short-term speed bumps are in view either. Analysts forecast the yield to go up to 10.45% for 2024 and 10.83% for 2025.
Safe stuff
Future payments look safe as well. Last year’s payout was covered 1.6 times by earnings and its solvency ratio came in at 189%, some way above management’s target of 140%-180%. The firm has cash on the balance sheet and in deferred earnings as well.
In terms of financials, it ticks every box. This isn’t true of some of the other 8%+ yielders, so I’m wondering what the catch is here.
The majority of Phoenix’s revenue comes from selling life insurance and pension plans. The defensive nature of the products is a good sign. This isn’t a tobacco stock where I’m chasing big dividends in a sunset industry.
A more likely story is general weakness in the UK finance sector. While earnings have been increasing for years, share prices continue to drift downward and Phoenix is no exception.
Since 2020, the stock is down about 34%. Recent weakness has been driven by rising interest rates. Higher rates have put pressure on the firm’s bonds in its life and retirement funds.
This is an ongoing risk. But with interest rate cuts on the horizon, the prospects for asset managers become rosier. Some analysts are predicting five rate reductions this year, which would ease the burden of suppressed asset prices.
My move
I’ve never owned the stock so it’s a question of whether I open a position here. In the past, I’ve taken a cautious approach to finance firms with multi-billion pound balance sheets, and that’s still the biggest thing putting me off here.
But the value looks terrific. Phoenix Group shares might be first in the queue the next time I make changes to my portfolio.
