In 2023, FTSE 100 savings, retirement, and insurance business Phoenix Group Holdings (LSE: PHNX) paid a total dividend of 52.65p.
On the current share price of £5.64, this gives a yield of 9.3%. This compares the FTSE 100’s 3.6% average return and the FTSE 250’s 3.3%.
So, £11,000 (the average UK savings amount) invested in the stock would make £1,023 in dividends this year.
Over 10 years on the same average yield this would rise to £10,230, and over 30 years to £30,690.
Dividend compounding can turbocharge returns
However, the return could be more than five times higher over time by using ‘dividend compounding’.
This uses the dividends paid to buy more of the stock. It is the same idea as leaving interest to keep building up in a bank account but using dividend payments instead.
Utilising this method on the same average 9.3% yield would make an additional £16,780, rather than £10,230 after 10 years.
Over 30 years, it would generate an extra £166,175, not £30,690.
Adding in the original £11,000 stake would give a total investment in Phoenix Group valued at £177,175. This would generate £16,477 in dividend payments every year, or £1,373 each month.
£0 in the bank to start with? No problem
Many people believe that making a lot of money through investing requires a big stake to begin with. But this is not the case at all.
Small amounts put aside each month can build into life-enhancing money if invested in high-quality, high-yielding stocks.
For example, just £5 a day (£150 a month) invested and compounded in Phoenix Group shares could grow into £29,753 after 10 years. This would pay £2,479 each year in passive income.
On the same basis, this small and regular investment would be worth £294,657 after 30 years. This would be generating yearly dividend payments of £27,403 by that time!
Do the high yields look sustainable?
Phoenix Group is in a very competitive business, so this might squeeze its profit margins. Any return of high inflation might cause some customers to cancel policies as well.
However, consensus analysts’ estimates are that the firm’s earnings will grow by 67.5% a year to end-2026. Earnings per share are expected to increase by 54.8% a year to that point.
Rising earnings drive increases in a company’s dividends and share price over time, and I expect this to happen here.
Phoenix Group has raised its dividend by 12.5% from 2019’s 46.8p to 52.65p now.
Analysts forecast that the payments will rise to 53.7p by the end of this year, 55.3p by end-2025, and 56.9p by end 2026.
This would produce yields of 9.5%, 9.7%, and 10%, respectively, for those years.
My approach to the stock
As for many investors, I suspect, Phoenix Group Holdings had not really registered with me until last March/April. This was when a mini-financial crisis pushed its shares down and yield up (to over 10%).
I was amazed to find that it is the UK’s largest long-term savings and retirement business.
At that point, I bought the stock based on that high yield and what I saw as very strong earnings prospects.
It has not let me down in either respect, so I will be buying more very soon.
This post was originally published on Motley Fool
