An 11%+ yield? Here’s the dividend forecast for this top FTSE 100 income share

Life insurer Phoenix (LSE: PHNX) already has one of the highest dividend yields in the FTSE 100, at 10.6%. But forecasts suggest the company’s payout will continue to rise, meaning that today’s buyers could soon enjoy a yield of 11% on the original cost of their investment.

Here are the latest broker consensus dividend forecasts for Phoenix:

For some companies, I would see such a high yield as a warning that a cut’s likely. But in recent years, Phoenix’s dividend has been consistently covered by the surplus cash it generates. I think the payout looks fairly safe.

In my view, Phoenix’s super-high yield reflects two other factors. One is that slow-growing life insurers are out of fashion with investors.The other is the market view that life insurers should offer higher yields than the 5% or so that’s available from UK government bonds.

Should we worry about bond yields?

The rising yields on UK government bonds (known as gilts) have featured in a lot of newspaper headlines recently. Higher yields can have an impact on life insurers such as Phoenix, who are big gilt buyers.

The cash income provided by a bond is normally fixed through its lifespan. This means that for the yield to rise, the market price of the bond must fall. For Phoenix, rising yields mean that the market value of its bonds is falling. The company has to report this lower value in its accounts. This can lead to scary-sounding losses, on paper.

In reality, there shouldn’t be any losses. Life insurers like Phoenix normally hold most of their bonds until they mature and are repaid by the borrower – in this case the UK government. At maturity, Phoenix will be repaid the full value of its bond, regardless of prices in the secondary market. Assuming the UK government doesn’t default on its debts, Phoenix shouldn’t lose any money because of rising bond yields.

In fact, rising yields may be good news for Phoenix. As its existing bonds are repaid, the company will be able to reinvest this cash in higher-yielding bonds. In turn, these will generate a higher investment income to support the insurer’s liabilities, such as annuities and pensions.

Phoenix dividend: totally safe?

No dividend’s completely safe. Payouts can always be cut and share prices may fall if unexpected problems emerge. Phoenix is no exception. One particular risk is that each year, some of its pensions and life insurance policies mature. In effect, the business shrinks.

To offset this and support continued dividend growth, it needs to continue buying new policies. Phoenix does this either by buying existing polices from other insurers, or by selling new products under its Standard Life brand.

It’s a competitive market. There’s always a risk growth will fall short of expectations.

My verdict

Phoenix stock has not been a great performer since its 2010 flotation.

However, I think the company’s income record is excellent. The dividend hasn’t been cut since 2010. My sums show Phoenix has delivered an annualised income of 7% a year since that time.

I think this FTSE financial stock is worth considering as a long-term income buy.