This blue-chip UK revenue inventory yields a shocking 8% – can it actually hold paying that?

A FTSE 100 revenue inventory with an ultra-high dividend yield is all the time tempting, however calls for cautious thought.

It’s an funding fact universally acknowledged {that a} yield of seven% or 8% should be approached with warning. Dividends are calculated by taking the dividend per share and dividing it by the share value. So if the share value falls, the yield mechanically climbs. Excessive yields can due to this fact counsel a struggling underlying enterprise.

The typical yield throughout the FTSE 100 is 3.25%. When a dividend hits 7%, 8%, or greater, alarm bells can ring. However there’s no laborious and quick rule. Some bumper yields are genuinely sustainable. In the event that they weren’t, I wouldn’t have purchased shares in Phoenix Group Holdings (LSE: PHNX) a few years in the past. On the time they yielded 10%, which is nice by anyone’s requirements.

Phoenix shares ship dividends

The share value was going nowhere a lot, therefore that yield. However Phoenix shares regarded low cost, with a price-to-earnings ratio of seven or eight on the time, roughly half the truthful worth determine of 15. I ran the rule over the corporate’s outcomes and noticed it was worthwhile, simply not booming.

The dividend observe document was spectacular, with eight hikes within the earlier 10 years. This advised the board was dedicated to rewarding shareholders each time possible.

I made a decision that when rates of interest began to slip, yields on money and bonds would mechanically fall, making excessive revenue shares like Phoenix look much more enticing. My hunch has largely performed out, with the Phoenix share value up round 30% during the last 12 months and 45% over two. That’s fairly useful development, from what’s primarily an revenue inventory. All dividends are on prime.

Are shareholder payouts sustainable?

The board stated it has a “progressive and sustainable” dividend coverage, supported by sturdy money era from its life insurance coverage companies.

To maintain it sustainable, it plans to extend the dividend by a modest 2% a 12 months. That’s effective by me. I’d moderately it was safe than racing forward unsustainably.

The yield’s forecast to hit 8.22% this 12 months, and climb to eight.46% in 2026. That actually is a superb price of revenue, however not with out dangers as Phoenix has to maintain producing the money to fund it.

It operates in a mature and aggressive sector the place any new development alternatives, akin to bulk firm pension transfers, are greedily pursued by opponents. Phoenix can also be on the mercy of a wider inventory market crash, which some are predicting in the intervening time. It has £280bn of belongings underneath administration, which might take a beating if shares fell throughout the board. If the worldwide financial system hits an prolonged hunch, the dividend might be minimize.

Investing for the long run

Phoenix isn’t resistant to market shocks, however the dividend outlook’s promising. It provide among the finest charges of revenue on the FTSE 100. There are dangers, however I feel it’s nicely price contemplating for income-focused buyers who take a long-term view. To me, this exhibits the usually missed energy of FTSE 100 shares.