Generating a sizeable passive income is a popular dream. Many investors dream of taking a chunk of cash, investing it in some high-yield stocks, and building a sustainable financial future.
With that in mind, here are a couple of big dividend payers that could turn a £20,000 lump sum into a £1,000 annual income stream.
High-yield asset manager
M&G (LSE: MNG) is one stock that’s worth considering for the dividend income. The well-known savings and investment firm provides pensions, insurance, and asset management services to customers.
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The company has a strong track record of paying out earnings to shareholders and currently boasts a 9.6% dividend yield. That’s almost triple the 3.5% average across the FTSE 100 index.
It does come at a cost, with a price-to-earnings (P/E) ratio of 29 that is nearly double that of the Footsie. Recent net outflows from clients raise the risk of a lower asset base and competition in the asset management business is cut-throat.
If M&G sees further outflows, that could seriously diminish its asset base and potential future profitability (and dividends!).
A £10,000 investment at the 5 February yield could potentially generate £960 in annual dividends. That’s a significant chunk of money and one that yield-hungry investors should consider, given the above-average dividends on offer.
Progressive dividend payer
Phoenix Group (LSE: PHNX) is another consistent dividend payer. The life insurer and asset manager has established a reputation for giving cash back to shareholders through significant distributions. That continues today with the stock currently boasting a 10.3% dividend yield as I write on 5 February.
The impressive figure is underpinned by Phoenix’s ability to generate significant cash from policy premiums and management fees. With around £290bn in assets under administration, that represents a serious amount of premiums.
One thing I like about the company is its strong cash flow forecasts. In fact, management expects to generate £4.4bn in cash for the three years to 2026. Throw in a healthy Solvency II capital ratio of 168% to boot and it has the foundations of a solid dividend stock.
This does give me some confidence in the near-term distributions. However, there are also longer-term risks. Regulatory changes, industry consolidation, and unexpected liability changes are just a few.
Life insurers are also subject to longevity risk. This is the risk that people are living longer than anticipated and the insurer must pay out more money, impacting profitability.
This, combined with a strong track record of dividends, means Phoenix is one for investors building a passive income to consider. That said, a higher for longer interest rate environment could hurt Phoenix. This is because the level of insurance plan funding can change as interest rates change, meaning unexpected interest rate changes are a risk.
Key takeaway
These are just a couple of high-yield dividend stocks that have a history of paying out handsomely to shareholders. While there are risks, including the high interest rate environment and possible outflows, M&G and Phoenix are two of the highest yielding in the Footsie.
That to me says they’re worth considering for investors wanting to build a sustainable passive income as part of a balanced portfolio. Diversification is an important part of long-term investing to mitigate risk and ride out the ups and downs of the stock market.
