Phoenix Group Holdings (LSE: PHNX) now offers the highest yield on the entire FTSE 100 at a stunning 11.38%. It’s also the UK’s most bought stock, according to AJ Bell. These two figures may not be coincidental.
A double-digit yield always catches the eye. Especially for an investor like me, who favours income over growth. The big danger is that it proves too expensive to maintain, yet there are reasons why this supersized payout might just be sustainable.
Phoenix generated £898m of cash in the first half of this year and hiked the dividend per share by 4.83%, to 26p. If the board is concerned that it can’t afford to maintain shareholder payouts, it has a funny way of showing it.
That’s a hefty income
A rocketing yield is often the sign of a plunging share price, and that’s the case here. The Phoenix share price is down 18.95% over one year and 24.48% over five years. That’s a pretty desperate return, and the dividend only offers partial compensation.
Like all insurers, Phoenix has to hold a huge pot of funds to pay customer claims (£269bn at last count) and has been hit by the stock market volatility of the last few years. Inevitably, its share price has been falling in recent weeks.
Markets are on a knife edge as investors wait to see whether inflation and interest rates have really peaked, and just how bad things get in the Middle East. Buying Phoenix shares today could go either way. If markets decide the risk has been overplayed and we see share price rallies, the stock could recover at speed.
If things turn nasty, then just because Phoenix has fallen 25% in the last six months doesn’t mean it can’t fall another 25%. Yet this is the risk with every stock purchase. Phoenix now trades at just 5.46 times earnings. If that’s not cheap enough for me to buy this super-high yielder today, when will it be?
For the sake of diversification I’m building a balanced portfolio of income stocks but what if I went all in on this one? I’m certainly tempted.
This bird could fly
A single person needs £23,300 a year to achieve the ‘minimum’ living standard in retirement, according to the Pensions and Lifetime Savings Association. That includes the new State Pension, which currently pays a maximum £10,600.
Let’s say I generated the remaining income – which works out as £12,700 – from Phoenix alone. Despite today’s 11.38% yield, I’d still need to invest a pretty hefty £111,599 to get that. Sadly, I’m nowhere near a big enough high roller to put so much in just one stock, even if it allows me to max out my income.
Phoenix looks tempting, but like every stock, it has risks. Management needs to maintain its aggressive acquisition strategy to keep the dividends flowing. Also, Phoenix posted a £1.76bn loss after tax last year. However, that’s a statutory IFRS figure, and the company reckons it made a positive adjusted pre-tax operating profit of £1.25bn. It does muddy the waters, though.
I’m still keen to build up a stake in this ultra-high income stock. But I’ll start with a much smaller sum than £111,599 and take it from there.
The post How many Phoenix Group Holdings shares must I buy to give up work and live off the income? appeared first on The Motley Fool UK.
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Harvey Jones 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.
