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Phoenix Group Holdings (LSE: PHNX) has been one of my top-performing passive income stocks since I bought it. ‘Passive’ income is money made with little ongoing effort – most pertinently in my view from dividends paid by stocks.
It is true that I put a great deal of thought into making such stock selections. However, once that is done, all that is needed is to periodically check that they are performing as required (they may not be, of course).
One-year performance
There are two elements that contribute to the absolute return of a dividend stock over time – share price and dividend.
Phoenix Group’s opening price on 10 June 2024 was £4.91. So £17,000 (the average UK savings account amount) would have bought 3,462 of its shares at that point.
Today’s opening price is £6.52 so the profit on the share price is £5,572.
Additionally over the year the savings and retirement giant paid a 54p dividend per share. So this means a further profit of £1,869.
Therefore, the total one-year profit on the £17,000 investment is £7,441 – or a 44% gain!
Time is key to unlocking huge dividend gains
I believe that the most important concept to appreciate in passive income stocks is that time is the greatest ally.
The longer a solid dividend stock keeps generating its payouts, the more profit an investor will see.
For example, on Phoenix Group’s current average yield of 8.3%, the £17,000 would make £14,110 in dividends after 10 years. On the same basis, this would rise to £42,330.
Crucially though, where time really comes into its own is when the standard investment practice of ‘dividend compounding’ is used.
This simply means reinvesting the dividends paid by a stock straight back into it.
By doing this on the same average 8.3% yield, the 10-year dividends would be £21,875 rather than £14,110. And on the same basis after 30 years, these would soar to £186,292, not £42,330.
Adding in the initial £17,000 and the holding would be worth £203,292 by then. This would be generating an annual passive income of £16,873 at that point.
The yield forecasts also look terrific
That said, analysts forecast that Phoenix Group will increase its dividends to 55.8p this year, 57.4p next year, and 59p in 2027.
This would give respective yields based on the current share price of 8.6%, 8.8%, and 9%.
Consensus projections are also that the firm’s earnings will increase by a phenomenal 95.1% a year to end-2027. And these are ultimately what power a firm’s share price and dividends over time.
Factoring in other analysts’ figures and my own into a discounted cash flow analysis shows Phoenix Group shares are also 16% undervalued.
Therefore, their ‘fair value’ would be £7.76.
A risk to these numbers is that cut-throat competition in the sector may squeeze the firm’s margins.
That said, its 17 March 2024 results saw IFRS adjusted operating profit jump 31% year on year to £825m. Additionally, the firm upgraded its IFRS adjusted operating profit target to around £1.1bn from £900m by end-2026.
Given the firm’s stunning earnings growth prospects and what this would mean for its dividends and share price, I will buy more of the stock very soon.
