This blue-chip UK income stock yields a stunning 8% – can it really keep paying that?

A FTSE 100 earnings inventory with an ultra-high dividend yield is at all times tempting, however calls for cautious thought.

It’s an funding fact universally acknowledged {that a} yield of seven% or 8% have to 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 routinely climbs. Excessive yields can subsequently recommend a struggling underlying enterprise.

The typical yield throughout the FTSE 100 is 3.25%. When a dividend hits 7%, 8%, or larger, alarm bells can ring. However there’s no arduous 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 monitor report was spectacular, with eight hikes within the earlier 10 years. This instructed the board was dedicated to rewarding shareholders at any time when possible.

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

Are shareholder payouts sustainable?

The board stated it has a “progressive and sustainable” dividend coverage, supported by robust 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 high quality by me. I’d fairly 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 basically is an excellent fee of earnings, 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, reminiscent of 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 meanwhile. It has £280bn of belongings beneath administration, which might take a beating if shares fell throughout the board. If the worldwide financial system hits an prolonged droop, the dividend could possibly be minimize.

Investing for the long run

Phoenix isn’t resistant to market shocks, however the dividend outlook’s promising. It provide the most effective charges of earnings on the FTSE 100. There are dangers, however I believe it’s nicely value contemplating for income-focused buyers who take a long-term view. To me, this reveals the customarily ignored energy of FTSE 100 shares.