Investing for company dividends is by far my favourite way to try to earn some long-term passive income.
Right now, there aren’t any bigger FTSE 100 ones on offer than the forecast 10.85% dividend yield from Phoenix Group Holdings (LSE: PHNX). That could mean £2,170 in my pocket this year if I put an ISA allowance of £20k into the stock.
But, attractive though a shiny dividend yield might be, there’s always another side to the coin. The share price is down 30% in the past five years. So the total return has been lower.
Buying opportunity
Still, for those of us who want the dividend income and don’t plan to sell our shares for at least another decade, share price weakness might not be a bad thing.
If it’s only a short-term dip, it can even be a bonus. That’s because we could bag more shares for the same money now, and lock in those big yields.
But, how do we balance the temptation of a big yield with the risk of further share price falls? Or worse, the chance of a dividend cut?
We can never guarantee a dividend. In fact, another of the FTSE 100’s double-digit whoppers, the 10.5% expected from Vodafone, is going to be cut in half in 2025. The company has already told us that.
Check the business
My main way to lower my risk is with diversification. I might spread my money across, say, 10 stocks in different sectors. And that should help buffer me against any individual company problems.
It does mean I’ll never earn 10% in dividend cash from my Stocks and Shares ISA as a whole. There just aren’t enough big ones to cover the diversity I’d want. But I’d rather settle for a bit less income if it means less worry.
Saying that, there’s another way I check my risks. And that’s to understand the business I’m buying, and work out whether I think it can keep the dividends going.
Solid business
In the case of Phoenix Group, I see a mix of safety and uncertainty.
Phoenix specialises in acquiring and managing closed life and pension funds. And that’s provided the cash flow needed to keep the dividends going for years.
But there are only so many closed funds around, and it’s not a growth business. So Phoenix has been moving into selling new products direct to customers.
It looks good so far, but increasingly it will be competing with firms like Aviva and Legal & General. And I know at least one of my Motley Fool colleagues doesn’t rate its chances in a battle with the established giants.
Competition
Still, those competitors also pay good dividends, if not quite as big.
And at the interim stage, the company did say it’s “on track to deliver our financial targets which support our progressive and sustainable dividend“.
I wouldn’t put all my cash into Phoenix, for sure. But I might just find a free slot for it in my ISA.
The post £20,000 in this FTSE 100 stock could get me £2,170 passive income per year appeared first on The Motley Fool UK.
5 Shares for the Future of Energy
Investors who don’t own energy shares need to see this now.
Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.
While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.
Open this new report — 5 Shares for the Future of Energy — and discover:
Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
How to potentially get paid by the weather
Electric Vehicles’ secret backdoor opportunity
One dead simple stock for the new nuclear boom
Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!
Grab your FREE Energy recommendation now
More reading
Down 12% in a month and yielding 10.7%! Is this November’s best passive income stock?
A UK share with a growing dividend and a yield over 10%
My £10-a-day plan to retire early on passive income!
2 dividend stocks from which I’m running a mile
Up 20% with a 10% yield? A top pick to consider for a Stocks and Shares ISA
Alan Oscroft has positions in Aviva Plc. The Motley Fool UK has recommended Vodafone Group Public. 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.
