The FTSE100 contains many companies that pay high dividends. These can be used to build wealth that can be passed on to the next generation.
One such stock that I bought for exactly this purpose is Phoenix Group Holdings (LSE: PHNX).
I don’t think many people know that the company operates some of the biggest brands in UK insurance, including Standard Life. It is also the biggest company in long-term savings and pensions, with £283 billion in assets under management and 12 million customers.
Steady dividend increases
One risk for stocks is a new financial crisis like the one in March/April 2023. This was caused by the collapse of Silicon Valley Bank and then Credit Suisse. It led to a fall in the prices of many stocks in the financial sector. Another risk is a new rise in inflation, which could slow down the generation of new business.
However, in 2023, the company paid a total dividend of 52.65 per share. At the current price of £5.41, this gives an annual yield of 9.7%. For comparison, the current average payout in the FTSE 100 is just 3.6%.
What is reassuring for me is that the company has continuously increased its dividend in recent years.
Working backwards each year from 2022, you would have paid 50.8p, 48.9p, 47.5p and 46.8p. This gave returns of 8.3%, 7.4%, 6.8% and 6.2% at that time.
How much money can it generate?
£11,000 (the average UK savings amount) invested in Phoenix Group shares yielding 9.7% would return £1,067 in the first year. Assuming the yield remains the same, the amount would be the same the next year.
After 10 years, £11,067 would have been added to the original investment of £11,000. After 30 years, the additional amount would have risen to £32,010.
That’s more than what a normal UK bank account would generate, but it’s not generational wealth in my opinion.
How can returns be increased?
To get one step closer to this goal, the dividends paid out each year can be used to buy more shares. This is called “dividend compounding.”
In this way, the £11,000 would generate an additional £17,904 after 10 years instead of £11,067. Again, this assumes the same average return of 9.7% over the period. But this amount can go down as well as up depending on annual changes in the share price and dividend payments.
However, after 30 years, an additional £188,576 would be collected instead of £32,010! The entire investment pot would then be worth £199,576 and would pay out £19,359 in dividends annually.
The purchasing power of the money would of course be lower at that point. However, for me it is a solid foundation for creating significant wealth that can be passed on to the next generation.
The post A 9.7%-yielding FTSE 100 dividend gem that could create generational wealth appeared first on The Motley Fool UK.
Further reading
Simon Watkins owns shares in Phoenix Group Plc. The Motley Fool UK does not own any of the stocks mentioned. The views expressed in this article on the companies mentioned in this article are those of the author and as such may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a broad range of insights makes us better investors.
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