Phoenix Group Holdings (LSE: PHNX) is a core stock in my passive income portfolio. This generates maximum dividend income with minimal effort on my part.
Holding such shares over the past 30 years has allowed me a better lifestyle than I would otherwise have enjoyed. It may also allow me to retire early.
My key requirement in all these passive income stocks is that they keep generating a big yield. And as a stock’s yield rises when its price falls, such a drop does not bother me.
It only becomes relevant to me if it signals a fundamental problem at the firm. This might cause a reduction in dividends at some point.
How healthy is this stock?
Earnings growth drives a firm’s dividend (and share price) higher over time. I think the main risk to Phoenix Group’s is a recurrence of the cost-of-living crisis, which may prompt customers to cancel policies.
However, analysts forecast that its earnings will increase by a stunning 60.31% each year to end-2027.
H1 2024 results showed its IFRS adjusted operating profit grew 15% to £360m. And it generated total cash reserves of £950m over the same period.
It is confident it will achieve the top end of its £1.4bn-£1.5bn cash reserves target range for full-year 2024.
Current yield and predictions
Phoenix Group paid a total dividend of 52.65p a share in 2023, giving a current yield of 10.1%. This is nearly triple the FTSE 100’s present average of 3.5%.
However, analysts project the dividend will rise to 53.3p for full-year 2024, yielding 10.3%.
It is forecast to rise to 55.8p in 2025, to 57.5p in 2026 and to 59.6p in 2027. These would produce respective yields of 10.7%, 11% and 11.4% on the current share price.
From 2019 to 2023 inclusive, the firm has increased its dividend each year from 46.8p to the current level.
Passive income generation potential
Investors considering an £11,000 (the average UK savings) holding in Phoenix Group would make £1,111 in first-year dividends. On the same average 10.1% yield, this would rise to £11,110 after 10 years and to £33,330 after 30 years.
This is more than a standard UK savings account would generate. However, it could be even greater if the dividends were reinvested back into Phoenix Group stock.
This is known as ‘dividend compounding’ and is like leaving interest in a savings account to grow.
Using the miracle of dividend compounding
By doing this on the same average 10.1% yield, an investor would make £19,074 instead of £1,111 after 10 years.
After 30 years on the same basis, this would rise to £213,801.
Adding in the £11,000 initial investment, the total Phoenix Group holding would be valued at £224,801.
At that point, it would be paying £22,705 a year in annual passive income from dividends.
Its consistently high yield in recent years and forecasts for more of the same mean I will be buying more of the shares very soon. And although projected high earnings growth may also push the share price up, I am not bothered if it does not.
