Many of us invest for passive income. One stocks that’s central to my passive income strategy is Phoenix Group (LSE:PHNX) which surged on 13 November. It’s a UK-based insurer that traditionally has focused on buying up mature or closed life insurance and pensions funds.
And if I had the money today, I’d buy another 1,000 shares in this company. At the current price, that would be almost £5,000 worth of stock, and would deliver just over £500 in passive income annually.
Here’s why.
A passive income giant
The obvious reason I invest in Phoenix Group is for the dividends, currently offering a yield of 10.5%. That puts it among the top dividend payers on the FTSE 100. And what’s more, it’s relatively safe. The dividend was covered 1.6 times by earnings last year.
One of the attractive aspects of holding Phoenix Group in my portfolio is its focus on stable and predictable cash flows.
As the company administers closed funds, it benefits from a steady stream of premiums and annuity payments without the exposure to underwriting risks associated with new policies.
And it’s these cash flows that make the dividend appear even stronger. After all, consistent and robust cash flows are a crucial foundation for sustaining dividend payments.
Insurers are overlooked
I believe insurers are overlooked at the moment. Part of the reason for this may relate to the Silicon Valley Bank (SVB) fiasco earlier in the year. Several stocks pushed lower after the related events and haven’t truly recovered.
Phoenix shares dipped after the Silicon Valley Bank crash and have continued moving downwards, despite some positive earnings. One reason for this is that insurers typically have large bond portfolios, and older bonds have seen their values fall as interest rates have risen.
Nonetheless, these are unrealised losses as the bonds are normally held through to maturity. More importantly, the business is continuing to perform and recently upgraded its cash generation targets after completing the funds merger of its Standard Life and Phoenix Life businesses into a single entity.
And this is reflected in the stock’s valuation. The company currently trades at 6.1 times earnings versus its five-year median of 10.9 times. This suggests investors are willing to pay less for the stock today than they have been throughout the past five years, despite the passive income offer.
Debt
It’s worth noting that some analysts suggest Phoenix is over-leveraged. Interestingly, the company says it’s towards the lower end of its targeted leverage range. Importantly, the debt maturity profile appears quite evenly spread.
Phoenix Group debt maturity profile as of 30 June 2023
Income secured?
There’s no such thing as a guaranteed source of passive income. Phoenix Group’s dividend coverage could be a little bit stronger, and this makes it vulnerable to changes in the macroeconomic environment and an uptick in insurance claims, due to things like catastrophic events.
Nonetheless, Phoenix Group is also experiencing several business tailwinds, including from auto-enrolment pensions and trends in bulk purchase annuities (BPA). In fact, with just 15% of defined benefit pension liabilities transfers to insurers, the BPA market could continue to grow.
Coupled with the points noted above, I believe it’s among the strongest passive income picks. And that’s why I’d buy more.
The post I’d buy 1,000 more shares in this stock for passive income… before it surges again appeared first on The Motley Fool UK.
We think earning passive income has never been easier
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
Get your free passive income stock pick
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
Looking beyond buy-to-let: 3 high-yield insurers for passive income
I’d buy 4,300 shares of this FTSE 100 financial stock to aim for £1,000 a month passive income
10%+ yield! Should I buy more Phoenix Group shares for passive income?
Forget buy-to-let, this 11.2% dividend yield is my passive income pick!
How many Phoenix Group Holdings shares must I buy to give up work and live off the income?
James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
