With interest rates starting to fall, building a second income through dividends looks more attractive than ever.
Banks and building societies are slashing rates on deposits, following the third Bank of England base rate cut on 6 February. Two or three more rate cuts could follow this year, and if they do, cash returns will fall further. So will bonds yields. With luck, dividend income will continue to rise.
Many FTSE 100 stocks offer solid value and sky-high yields, making them ideal for investors seeking passive income.
Can Phoenix dividends keep rising?
Dividends aren’t guaranteed though. Companies need to generate cash to fund them. This makes important to focus on companies with strong fundamentals. That means looking at revenue growth, customer retention cash flow and debt levels to assess whether the dividend is sustainable in the long run.
While a high yield is tempting, it’s important to ensure the company can continue to pay – and hopefully increase – it in the years ahead.
One standout dividend stock to consider is Phoenix Group Holdings (LSE: PHNX), which currently boasts the highest yield on the FTSE 100 at a staggering 10.21%.
For an investor who puts a full £20,000 Stocks and Shares ISA into Phoenix shares, that translates into an annual income of £2,040. Or £170 per month.
Even better, forecasts suggest the yield will rise to 10.5% this year and 10.8% next, potentially boosting that income further.
So by 2026 our investor could be getting income of £2,160 a year, or £180 a month. And more thereafter, if the dividend holds. Plus any share price growth on top.
Phoenix is a specialist in managing closed life insurance funds, meaning it buys up policies from other providers and runs them efficiently using its economies of scale.
This generates steady cash flow, crucial for maintaining that dividend. The board remains confident about its sustainability, recently reiterating its commitment to long-term shareholder returns.
As with any high-yield stock, risks remain. While buying up life insurance books has worked well so far, any misstep in integrating new assets could strain cash flow and threaten dividends. Plus it needs to keep finding new books to buy. While making a success of diversifying into other areas.
Falling interest rates won’t necessarily work in its favour. Lower returns on cash and bonds could hit its investment portfolios, impacting profitability.
The FTSE 100 offers capital growth too
As with any stock, even a £5bn blue-chip, capital is at risk. Phoenix shares climbed 5% in the past year but are down 35% over five years. Long-term holders have seen much of their dividend income wiped out by capital losses.
Its shares now look decent value today, trading at a price-to-earnings (P/E) ratio of around 15, roughly in line with the FTSE 100 average.
Recent momentum has been positive, with the stock up 7% in the last month as falling interest rates revive investor interest. With US markets looking expensive, UK dividend stocks like Phoenix are attracting more attention.
No investor should put all their ISA into one stock, no matter how attractive the yield. A diversified portfolio is essential to spreading risk. While Phoenix offers a high income, a broader mix of stocks can provide a balance between dividend yield and capital growth, offering investors the best of both worlds.
This post was originally published on Motley Fool
