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Phoenix Group Holdings (LSE: PHNX) has been a star performer in my passive income portfolio since I bought it in March 2023. This collection of shares is aimed at making money with little effort on my part (hence the ‘passive’ label).
At that point, it was going at a bargain price by my reckoning. The failure of Silicon Valley Bank back then had raised market fears of a new global financial crisis. This did not happen, but it did provide me with a great opportunity to buy quality shares on the cheap.
Analysts’ forecasts at the time were that Phoenix Group would continue to increase its dividends over the next three years. In 2020, it had paid 47.5p, the following year, 48.9p, and in 2022, 50.8p.
At the close of 2023, the total dividend was 52.65p, giving a yield of nearly 10%. By comparison, the average FTSE 100 yield at the time was 3.6%.
In 2024, it paid 54p, giving a yield on the current £6.43 price of 8.4%. This fall in yield results from a gain in share price, as the two move in opposite directions, given the same annual dividend.
What’s the passive income outlook now?
Looking at the next three years, analysts forecast the dividend will rise to 55.8p this year, 57.4p next year, and 58.9p in 2027.
This would give respective yields based on the current share price of 8.7%, 8.9%, and 9.2%.The current average yield of the FTSE 100 is 3.5%.
So investors considering a £5,000 holding in the firm would make £420 in first-year dividends on the current 8.4% yield. Over 10 years on the same basis, this would rise to £4,200, and over 30 years to £12,600.
However, using dividend compounding could dramatically increase these returns. This is where the dividends paid by a share are simply reinvested back into it.
By doing this on the same 8.4% average yield, the dividends over 10 years would be £6,548 rather than £4,200. And over 30 years on the same basis, these would increase to £56,600, not £12,600.
Adding in the initial £5,000 would give a total value of the Phoenix Group holding of £61,600. And this would generate an annual passive income of £5,174 by that point.
Does the business look strong?
The powerhouse of any firm’s share price and dividends over time is earnings growth.
A risk for Phoenix Group is the high degree of competition in the financial sector that may squeeze its margins.
However, analysts forecast that its earnings will increase by a spectacular 95% each year to end-2027.
This looks well supported by recent results to me. Its full-year 2024 numbers released on 17 March showed the insurance and investment giant’s adjusted operating profit jump 31% year on year to £825m. Operating cash generation increased 22% to £1.403bn over the same period.
At the same time, the firm raised its total cash generation target from £4.4bn to £5.1bn by end-2026. Its adjusted operating profit target was also upgraded to around £1.1bn from £900m by the same point.
Will I buy more of the stock?
Given its stunning earnings growth forecasts, I will buy more of the shares very soon. I believe these increases will power its share price and dividend much higher in the coming years.
