Picture supply: Getty Pictures
As an investor, I definitely just like the passive earnings prospects provided by dividends. However whereas a dividend inventory might dangle a juicy yield, that’s by no means assured to final. In spite of everything, a dividend can all the time be lower at any second.
That helps clarify why, like all smart investor, I diversify my portfolio throughout totally different investments. It additionally explains why I take a look at the supply of an organization’s dividend when investing. After which contemplate how sustainable it appears to be like sooner or later.
That’s true for dividends of any measurement, though generally high-yield shares can current a selected crimson flag relating to dividend sustainability.
FTSE 100 firm with a excessive yield
That brings me to FTSE 100 insurer Phoenix Group (LSE: PHNX).
For a blue-chip firm within the lead index, its 7.9% yield is eye-catching. That’s effectively over double the present FTSE 100 yield. However Phoenix’s administrators purpose to continue to grow the dividend per share yearly, as they’ve been doing over current years.
So is it sustainable?
Wanting on the supply of earnings
When assessing how well-covered a dividend is, monetary companies firms could be onerous to guage. A brick maker or airline, for instance, has cash coming in from prospects to pay for items or companies, that it then must ship. So assessing the accounts can appear comparatively easy (although in apply it could not all the time be so).
However an insurer is often seeing money circulate in or out on a big scale that isn’t its personal, however that of its shoppers. In the meantime there are guidelines about tips on how to account for investments it holds primarily on their behalf. Which means fluctuations of their worth can have an effect on the revenue and loss account of a monetary companies agency even when its money place has not essentially modified.
Phoenix’s mortgage ebook is an instance. The corporate has made sure assumptions concerning the worth of the properties in it. If there’s a property market crash and people assumptions are too beneficiant, that would result in the corporate’s income falling.
Clearly that it’s an precise threat. Properties may very well be price much less after a property crash than they’re now. However alongside the way in which (generally for many years) such assumptions and shifting valuations could make it difficult to evaluate how sustainable a monetary companies firm’s dividend could also be.
Giant firm, confirmed enterprise mannequin
Phoenix once more supplies an instance. Final yr, on an Worldwide Monetary Reporting Requirements (IFRS) foundation), Phoenix’s loss after tax was £1.1bn. Which may sound alarming for an organization that spent £533m on paying dividends.
However revenue and loss is an accounting measure (albeit a useful one). The corporate’s whole money era final yr was £1.8bn. That may be a dramatically totally different determine to the reported loss after tax – and explains why Phoenix was in a position to develop its dividend per share by 3% and categorical confidence in ongoing annual dividend per share development.
Phoenix’s manufacturers reminiscent of Customary Life serve round 12m prospects and it has virtually £300bn of whole belongings beneath administration. It has a confirmed enterprise mannequin and deep insurance coverage market experience. I’m optimistic that may assist it proceed to generate massive quantities of surplus money.
I see it as a dividend inventory for traders to contemplate.