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A FTSE 100 earnings inventory with an ultra-high dividend yield is all the time tempting, however calls for cautious thought.
It’s an funding reality universally acknowledged {that a} yield of seven% or 8% should be approached with warning. Dividends are calculated by taking the dividend per share and dividing it by the share worth. So if the share worth falls, the yield routinely climbs. Excessive yields can subsequently recommend a struggling underlying enterprise.
The common yield throughout the FTSE 100 is 3.25%. When a dividend hits 7%, 8%, or greater, alarm bells can ring. However there’s no laborious and quick rule. Some bumper yields are genuinely sustainable. In the event that they weren’t, I wouldn’t have purchased shares in Phoenix Group Holdings (LSE: PHNX) a few years in the past. On the time they yielded 10%, which is sweet by anyone’s requirements.
Phoenix shares ship dividends
The share worth was going nowhere a lot, therefore that yield. However Phoenix shares appeared low cost, with a price-to-earnings ratio of seven or eight on the time, roughly half the truthful worth determine of 15. I ran the rule over the corporate’s outcomes and noticed it was worthwhile, simply not booming.
The dividend monitor document was spectacular, with eight hikes within the earlier 10 years. This advised the board was dedicated to rewarding shareholders each time possible.
I made a decision that when rates of interest began to slip, yields on money and bonds would routinely fall, making excessive earnings shares like Phoenix look much more enticing. My hunch has largely performed out, with the Phoenix share worth up round 30% over the past yr and 45% over two. That’s fairly useful progress, from what’s primarily an earnings inventory. All dividends are on high.
Are shareholder payouts sustainable?
The board stated it has a “progressive and sustainable” dividend coverage, supported by robust money era from its life insurance coverage companies.
To maintain it sustainable, it plans to extend the dividend by a modest 2% a yr. That’s high quality by me. I’d fairly it was safe than racing forward unsustainably.
The yield’s forecast to hit 8.22% this yr, and climb to eight.46% in 2026. That basically is an excellent price of earnings, however not with out dangers as Phoenix has to maintain producing the money to fund it.
It operates in a mature and aggressive sector the place any new progress alternatives, resembling bulk firm pension transfers, are greedily pursued by opponents. Phoenix can also be on the mercy of a wider inventory market crash, which some are predicting in the mean time. It has £280bn of belongings below administration, which might take a beating if shares fell throughout the board. If the worldwide economic system hits an prolonged hunch, the dividend might be minimize.
Investing for the long run
Phoenix isn’t proof against market shocks, however the dividend outlook’s promising. It supply probably the greatest charges of earnings on the FTSE 100. There are dangers, however I believe it’s properly value contemplating for income-focused traders who take a long-term view. To me, this exhibits the customarily ignored energy of FTSE 100 shares.
