Time for me to buy this hidden FTSE 100 gem for turbo-charged passive income?

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.

Image source: Getty Images

Phoenix Group Holdings (LSE: PHNX) is not the first FTSE 100 stock that would spring to the minds of an investor like me. It is probably not even the first in the index’s life assurance and pensions sector either.

Standard Life would probably be up there, or Pearl Assurance, or even Sun Life. These three businesses, though, are all part of Phoenix Group Holdings. 

This absence of any brand premium is reflected in its 15% share price fall from February, in my opinion.

However, it also indicates to me part of its hidden value. The other part is its enormous passive income potential.

Huge passive income potential

Warren Buffett famously said: “If you don’t find a way to make money while you sleep, you will work until you die”. And the Sage of Omaha’s notion of passive investing remains the Holy Grail of making money.

For me, there is no more effective passive way of making money than investing in high-dividend-paying shares. But, like all investments, they must be well-chosen, and to me Phoenix Group Holdings ticks all the right boxes.

Firstly, it pays big dividends. In 2022, its dividend was 50.8p per share, which gave a yield of 8.3% back then. In 2021, it paid 48.9p (7.5%), and in 2020 the payment was 47.5p (6.8%).

The yield based on the current share price of around £5.50 is 9.2% — one of the very best in the FTSE 100.

If I invested £10,000 in the stock now, I would make £920 this year in passive income from it. If such a payout level remained in place for 10 years, then my £10,000 investment would have made another £9,200.

And that 92% 10-year return would not include further gains from any reinvestment of dividends or share price appreciation.  

On the flipside, it would also not include tax on my investment according to my circumstances during those years.

By comparison, the FTSE 100’s current average yield is around 3.7%. Next year it is forecast to be about 4%.

Solid fundamentals add support 

As important to me in anticipating future dividends is that the dividend cover in this stock is solid. This is the ratio of a company’s earnings to the dividends paid and indicates how well-funded they are or not.

Dividend coverage above 2 is considered good, while it being below 1.5 may indicate the risk of a potential dividend cut. Phoenix Group Holdings’ dividend cover for 2022 was 1.6, for 2021 it was 1.62, and for 2020 it was 1.93.

Additionally positive for me is that its core business looks solid. In its 2022 results, it announced a 1.2% rise in adjusted operating profit to £1.25bn. It also announced cash generation of £1.5bn, ahead of its previous guidance of up to £1.4bn.

This was all done while maintaining a solvency ratio of 189%, well above management’s target of 140%-180%. This on its own offers enormous scope for further investment for growth.

The key risk in the stock for me is continued high inflation. This tends to push insurance premiums higher and prompt customers to cancel policies.

However, if I did not already have holdings in the sector I would buy this stock now. The dividends alone are stellar, and I also think the share price could recoup all its losses this year.

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