When investing in the stock market, returns can come from a couple of different sources. One is the increase in value of a share during the period I own it. The other is dividends. Neither is guaranteed, even for a share in the blue-chip FTSE 100 index.
Still, by considering the prospects for those two possible sources of return, I can try to get a handle on what any given share might end up meaning for me financially.
Imagine my quest as an investor was to find the most lucrative share on the FTSE 100. Here is how I might go about it.
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High yield – and a growing dividend
Looking at dividends first, my eye would immediately be drawn to the highest-yielding share in the FTSE 100.
Offering a yield of 10%, that share would hopefully pay me £10 in dividends each year for £100 invested now.
That presumes the dividend is maintained, of course. In practice, that may not happen. Then again, this is a company that has grown its dividend per share annually for the past few years. It has also set out what is known as a progressive dividend policy. In layman’s terms, that means this FTSE 100 firm aims to grow its dividend per share each year.
Proven if unexciting business
The company in question is Phoenix (LSE: PHNX). Never heard of it? I suspect a lot of people are in the same position. But Phoenix is a leading insurance provider in the UK, thanks to its brands such as Standard Life and SunLife.
It has around 12m customers, making it the country’s leading retirement savings and income business. With such well-known brands and a large customer base, I see Phoenix as having a meaningful competitive advantage.
That helps it turn a profit which, in turn, enables it to pay dividends. While Phoenix’s business may seem unexciting, I do think its dividend is noteworthy. Investing in a FTSE 100 share and earning close to a double digit percentage dividend yield is a rare thing.
Phoenix faces risks. One is its mortgage book. In the event of a property market crash, it might have to mark down the valuations it has put on some properties, hurting profitability.
Still, from an income perspective, I see Phoenix as a share that continues to offer a potentially very lucrative passive income stream.
Share price shows long-term decline
Enough about the dividend. What about the second component of possible investor gains (or losses), the share price movement?
Here, I feel, things are disappointing. Over the past five years – despite that juicy dividend – the FTSE 100 share has fallen 25%. That means it has lost a quarter of its value.
Past performance is not necessarily a guide to what may happen in future. Still, the Phoenix share price performance has been disappointing. I think that, at the current level, it offers value.
Although it currently has the highest dividend yield, Phoenix may not be the most lucrative FTSE 100 share in years to come. But I think investors should consider buying it.
