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The FTSE 100 incorporates many corporations that pay excessive dividends. These can be utilized to create wealth that may be handed on down by the generations.
One such inventory that I purchased for exactly this objective is Phoenix Group Holdings (LSE: PHNX).
Unknown to many I believe it that it operates a few of the greatest manufacturers within the UK’s insurance coverage enterprise, together with Commonplace Life. Additionally it is its largest long-term financial savings and retirement enterprise, with £283bn of belongings beneath administration and 12 million clients.
Regular dividend will increase
A danger within the shares is a brand new monetary disaster of the kind seen in March/April 2022. This was attributable to the failure of Silicon Valley Financial institution after which Credit score Suisse. It causes the costs of many monetary sector shares to drop. One other is any new rise in inflation which may act as brake on new enterprise era.
Nevertheless, in 2023, it paid a complete dividend of 52.65p a share. On the present worth of £5.41, this supplies an annual yield of 9.7%. By comparability, the present common payout on the FTSE 100 is simply 3.6%.
Reassuringly for me, the agency has steadily been rising its dividend over the previous few years.
Working backwards every year from 2022, it paid 50.8p, 48.9p, 47.5p, and 46.8p. These offered respective yields on the time of 8.3%, 7.4%, 6.8%, and 6.2%.
How a lot cash can it generate?
£11,000 (the typical UK financial savings quantity) invested in Phoenix Group shares yielding 9.7% would make £1,067 within the first yr. Assuming the yield stays the identical, it could make the identical quantity subsequent yr.
After 10 years of this, there can be an additional £11,067 so as to add to the preliminary £11,000 funding. After 30 years, the extra determine would have risen to £32,010.
This exceeds what a typical UK checking account would generate. But it surely doesn’t qualify as generational wealth in my guide.
How can the returns be turbo-charged?
To maneuver a step nearer to that, the dividends paid out every year can be utilized to purchase extra of the shares. This is named ‘dividend compounding’.
By doing this, the £11,000 would generate an additional £17,904 after 10 years, quite than £11,067. This once more assumes the identical 9.7% common yield over the interval. However this will go down in addition to up, relying on adjustments in share worth and dividend funds every year.
Nonetheless, over 30 years there can be a further £188,576 as an alternative of £32,010! The full funding pot can be price £199,576 by that time, paying £19,359 a yr in dividends.
The shopping for energy of the cash can be much less by that point, after all. Nevertheless, it seems a strong basis to me for the creation of great wealth that may be handed down by the generations.
