Passive income is a simple idea, but it can be tricky to understand fully. Imagine earning extra money without having to work for it all the time. You won’t find this by just having a regular job, but you can get it by investing in top companies like Phoenix Group Holdings (LSE: PHNX).
When you invest your money in stocks, like Phoenix, you can receive dividends, which are payments made to you by the company. These dividends come into your account year after year without you needing to do much work. Over time, as Phoenix pays more dividends, you could make even more money.
One way to make this money grow faster is by reinvesting the dividends you receive. This means using your dividend payments to buy more shares. More shares mean more dividends, which helps your investment grow even faster. The longer you keep your money invested, the more it will grow.
I plan to hold my Phoenix shares for decades to come. While this idea is attractive, it comes with some risks. First, there’s the chance that the money I invest could lose value. If Phoenix’s business plan doesn’t go well, the stock price might drop, and I could lose some of my investment.
Second, dividends are never guaranteed. Companies must make enough money to pay dividends, and Phoenix could face challenges. Phoenix’s dividend yield is very high—around 10.5% now and expected to reach 11% in 2025. That’s much better than the returns from cash or bonds, but can Phoenix keep this up?
Phoenix manages life insurance, pensions, and other financial products for millions of customers. The company invests a lot of money on behalf of its clients. Some well-known brands under Phoenix include Standard Life and ReAssure. Even though the company has a good record of raising its dividends, it is also considering selling off some parts of its business, like SunLife.
In the first half of the year, Phoenix made £950 million in cash, which is a 5.8% increase. The company aims to reach £1.5 billion for the entire year. But the financial world has been tough since the pandemic, and Phoenix’s stock price has dropped 3.91% over the last year and 33.55% over the past five years, meaning the value of my shares has fallen, even though I’ve received dividends.
I’m still hopeful that my dividends will keep growing over time. Phoenix’s shares are priced at a reasonable level based on their earnings. But it’s possible that the stock price won’t change much in the next year, especially if interest rates stay high or the UK economy has trouble.
I’ve invested £5,000 in Phoenix, and I’m excited to see some nice dividends next year, no matter what happens to the share price.
Let’s imagine what could happen if I keep my shares for 30 years and the dividend stays at 11%. If I reinvest all the dividends, my £5,000 could grow to £114,461 by the end of that time. This assumes that the share price doesn’t change at all. If the stock price goes up by an average of 3% every year, my total investment could reach £254,750. That’s not bad for an initial investment of £5,000.
Over 30 years, a lot can happen, which is why I also spread my investments across many different companies. But this example shows the benefits of holding onto dividend stocks for a long time. I plan to stick with Phoenix and hopefully build a nice second income, no matter what happens with the stock price.
