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Phoenix Group Holdings (LSE: PHNX) has been one of my best passive income providers since I bought it in 2023. This sort of income is made with little ongoing effort on the part of the recipient.
In the case of stock dividends, the only real effort needed is to select the shares in the first place. After that, it is just a question of reviewing them periodically to ensure they are performing as they should.
How’s the firm been doing?
When I bought the stock it had a dividend yield of over 10%, which has fallen to 8.2% now.
This is simply a function of the fact that a share’s yield moves in the opposite direction to its price, given the same annual dividend.
Back in 2023 when I bought it, Phoenix Group’s share price had been affected by a mini-financial crisis. This arose from fears that the failure of Silicon Valley Bank would spark a wider financial meltdown.
I thought this extremely unlikely, given the capital-boosting measures ordered by the Bank of England after the 2007/08 financial crisis. So I took and took advantage of the bargain pricing to purchase several stocks in the UK’s financial sector. Since then, all of them – including Phoenix Group – have risen in price, so reducing their yields.
Nonetheless, the insurance and investment giant is still yielding way more than the FTSE 100 average of 3.4%. It is also significantly outperforming the 10-year UK government bond – the ‘risk-free rate’ – of 4.6%.
Moreover, analysts forecast that it will increase its dividend to 55.5p this year, 57.1p next year, and 58.9p in 2027.
This would give respective yields of 8.4%, 8.7%, and 8.9%.
What about the yearly passive income?
Using only the current 8.2% yield, another £10,000 investment by me would make £820 in first-year dividends. This would rise to £8,200 over 10 years and to £24,600 after 30 years. Thirty years is what I regard as the standard investment cycle – from 20 to possible early retirement at, say, 50.
However, these amounts could be way more if the dividends were reinvested back into the stock – known as dividend compounding. This is a similar concept to leaving interest to accrue in a regular bank savings account.
By doing this, I would make £12,642 in dividends after 10 years, rather than £8,200. After 30 years, this would increase to £106,073 instead of £24,600.
Adding in the initial £10,000 investment, the holding would be worth £116,073 by then. And this would pay me an annual passive income – from dividends – of £9,518!
My investment view
A risk to Phoenix Group is the high degree of competition in its sector that may reduce its earnings. And ultimately, it is earnings growth that powers any company’s stock price and dividends over time.
However, in Phoenix Group’s case, consensus analysts’ forecasts are that its earnings will grow by a stunning 106% a year to end-2027.
Consequently, I will be buying more of the stock very shortly indeed.
