£11,000 in financial savings? The best-yielding inventory on the FTSE 100 might present an £11,736-a-year second earnings

Whereas Vodafone gives a whopping 10.4% dividend yield, that’s set to be lower in half from subsequent yr. Due to this fact, as I write, the highest-yielding inventory on the FTSE 100 is insurance coverage participant Phoenix Group Holdings (LSE: PHNX) with a thumping dividend yield of 9.8%. However how might I translate that engaging payout right into a steady second earnings?

Let’s assume that I had £11,000 saved. That’s across the common quantity of financial savings within the UK. I might go away that within the financial institution and doubtless discover a financial savings account with a fairly first rate rate of interest. However rates of interest are starting to be lower. And once they fall, so will the speed I obtain.

As a substitute, I’d put it to work within the inventory market.

Breaking it down

Taking Phoenix Group’s yield and making use of it to my lump sum should see me earn £1,078 a yr as a second earnings. I might withdraw that cash yearly and put it in direction of payments or luxuries similar to holidays.

Nonetheless, I wouldn’t try this. As a substitute, I’d reinvest each dividend I acquired into shopping for extra shares. That means, I’d profit from ‘dividend compounding’.

If I did that for 25 years, by then I’d make a second earnings price £11,736. Furthermore, my lump sum would have grown from £11,000 to £126,203.  

What’s much more spectacular is that if I invested an extra £100 a month alongside my £11,000, after 25 years, I’d earn a second earnings price £23,601.

Diversification is vital

After all, that’s assuming a couple of issues. First, that assumes the share worth and yield don’t change (unlikely, though it’s nonetheless a worthwhile train). Whereas I’d hope to see development in its share worth and payout, I’m conscious the other might occur.

On prime of that, that’s assuming I invested all my financial savings into one firm. Whereas which will look like a sensible concept, it makes me liable to volatility.

That being mentioned, I nonetheless assume Phoenix Group could be a savvy purchase as a part of a diversified portfolio. If I had the money, I’d purchase the inventory immediately.

Rising yield

The insurance coverage large hiked its dividend by 3.6% final yr to 52.7p. It has been steadily rising its dividend over the previous decade, which I at all times prefer to see.

Moreover, analysts count on this to proceed. The inventory has a forecast yield of 9.9% in 2024. That rises to 10.3% in 2025. Not dangerous.

A forecast rising yield is all properly and good. Nonetheless, traders must be do their due diligence to see if a dividend is sustainable.

Phoenix Group has a stable stability sheet with a Solvency II capital ratio of 176%. Final yr it generated £2bn of money, exceeding its goal by £200m. Each of these will assist prop up its dividend.

The insurance coverage business is cyclical, which is a threat. Its share worth has suffered over the previous couple of years as pink scorching inflation has dented investor confidence. Excessive charges additionally negatively impression the worth of Phoenix Group’s property. So, a delay in future price cuts would spell hassle.

However its share worth has been making up good floor not too long ago. From its April low, it has risen 13.8%. The shares don’t look too badly priced although, buying and selling on simply 11.4 instances ahead earnings.