The FTSE 100 has a reputation for offering defensive, high dividend-yielding stocks for passive income investors. However, it’s not every day that investors get the opportunity to lock in a 10.3% dividend yield.
Right now, Phoenix Group Holdings (LSE:PHNX) currently offers the largest shareholder payout in the UK’s flagship large-cap index. And what’s more, management’s still hiking dividend payouts. Is this too good to be true, or is it a screaming buy for UK income investors?
A bright-looking future
Insurance may not be the sexiest industry out there, but for Phoenix shareholders, it’s proving to be a lucrative one. Today, the firm has a market capitalisation of £5.2bn. That’s actually towards the lower end of its 10-year range when looking at the historical stock price chart. However, dividends have been flowing and growing throughout this period, more than offsetting the stagnant share price return.
Looking at the latest analyst forecasts, it seems opinions are relatively bullish, with earnings expected to expand over the next two years. All being equal, that paves the way for even higher dividends.
In fact, the current consensus predicts that the full-year dividend for 2024 will reach 54.14p before climbing to 55.7p in 2025. When compared to the current share price, that places the forward dividend yield at a staggering 10.6%.
That means for every £10,000 invested in this FTSE 100 stock, investors are expected to earn £1,060 in dividends each year. Needless to say, compared to a 3% interest rate on a savings account, that’s quite a substantial difference.
So why aren’t more investors capitalising on this opportunity?
Nothing’s risk-free
As is the case with every stock, even those in the FTSE 100, Phoenix’s dividend future is far from guaranteed. This is especially true given the firm’s currently in the middle of transitioning towards a broad-based pension provider from a speciality provider.
In other words, Phoenix is entering a new space in the insurance market for the first time. While this move does open the door to new long-term opportunities, it also exposes the group to fierce competition from rivals like Aviva – a company with far more experience and resources to protect its market share.
This uncertainty appears to be giving a lot of institutional investors pause. After all, it’s unknown whether Phoenix’s new strategy will be a success or cause the insurance giant to fall flat on its face, taking its impressive dividend yield with it.
Personally, I’m erring on the side of caution and waiting to see more progress in the transition. That could mean I might be missing out on a rare opportunity to secure a sustainable double-digit yield.
But with other lower-risk, high-yielding income opportunities to pick from, that’s a decision I’m happy to make.
