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Phoenix Group (LSE:PHNX) has proven to be one of the FTSE 100The best dividend stocks over the last decade. It even continued to increase shareholder payouts during the Covid-19 crisis, when other blue-chip stocks were cutting, canceling and postponing dividends.
The Footsie is home to many great dividend growth stocks. wise group, Ashtead Group and Halma are just a few of the blue-chip stocks with a long history of uninterrupted payout growth.
However, these companies don't offer the market-crushing dividend yields of Phoenix stocks. These will eventually increase up to 10% in the medium term, as the following table shows.
| Year | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2024 | 54p | 3% | 9.9% |
| 2025 | 55.7p | 3% | 10.2% |
| 2026 | 57.3p | 3% | 10.5% |
The prospect of earning dividend income in excess of the FTSE 100 over the period is tempting to me. The average term return on Footsie shares stands at 3.5%.
But dividends are never guaranteed and I have to consider how realistic these forecasts are. I must also consider other factors that impact Phoenix's investment case. The big dividends might be of no use if the company's stock price plummets.
This is my vision of the mammoth of financial services.
bad omen
To be honest, my first opinion on Phoenix's dividend prospects is not encouraging. I'm looking at dividend coverage, which indicates how well expected payments are covered by expected earnings.
Like dividend forecasts, earnings estimates can also be wrong. Therefore, a reading of 2x or higher provides investors with solid protection.
In the case of Phoenix, the projected earnings of 44.9 pence per share by 2024 are actually lower than the expected dividend per share of 54 pence.
The ratio changes starting next year, but dividend coverage of 1x and 1.1x for 2025 and 2026, respectively, is far from solid.
good omen
That said, I wouldn't say Phoenix's poor dividend coverage is a deal breaker. Earnings per share have regularly outpaced dividends in recent years, but this hasn't hampered the company's ability to pay a huge and growing dividend.
Past performance is not a reliable guide to the future. But a look at Phoenix's balance sheet fills me with optimism.
As of June, its Solvency II capital ratio was 168%. This was within the company's target of between 140% and 180%.
Phoenix is a cash generating machine. And as a potential investor, I'm encouraged by its ability to regularly meet (or even exceed) its cash creation goals.
Strong cash generation in the first half, for example, led the company to state “We are confident of reaching the top of our target range of £1.4 billion to £1.5 billion in 2024..”
A Top Dividend Stock
Consequently, I'm quite optimistic about Phoenix's dividend forecasts for the next few years. My main concern is whether its share price could struggle through 2026. Difficult economic conditions and the ever-present threat of market volatility could negatively impact the business.
However, as a long-term investor, this is not a deal breaker for me. I believe Phoenix's stock price will rise steadily over time as demographic changes drive demand for retirement products. In fact, I think its value could increase as interest rates fall.
And in the meantime, you could expect juicier dividends. This is a stock I will seriously consider the next time I have cash available to invest.