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A big dividend yield from a passive income stock can sometimes seem too good to be true. We need to be cautious, for sure.
But it’s easy to be too pessimistic and miss out on some potential winners. The three I’m looking at here definitely tick some of the ‘caution’ boxes. But it could be a mistake to overlook them.
Big 9% yield
There’s a forecast 9% dividend yield at FTSE 100 insurance firm Phoenix Group Holdings (LSE: PHNX). It posted a loss in 2024 while still handing over a stash of dividend cash. And even though forecasts show earnings storming back over the next two years, we still wouldn’t see the dividend covered by earnings.
But traditional measures like dividend cover can be less meaningful in the insurance sector, certainly in the shorter term. And it can be a very cyclical business, which can lead to volatility — in both earnings and share prices.
At FY 2024 time, CEO Andy Briggs said the firm’s growth success had “led us to upgrade our cash generation and adjusted operating profit targets through to 2026” and helped in “sustaining our progressive dividend.”
If I didn’t already have a chunk of Aviva, Phoenix (or maybe Legal & General) would be near the top of my candidates’ list.
Even bigger
Ashmore (LSE: ASHM) has a forecast dividend yield of 11.6%, boosted by a scary 60% share price slide over the past five years. What’s the chance of the FTSE 250 investment manager actually paying out? Well, forecasts show the dividend steady at the current level out to 2027.
With February’s interim results update, CEO Mark Coombs said: “Based on the group’s performance over the six-month period, the group’s strong financial position, cash generation, and the near-term outlook, the board has maintained the interim dividend at 4.8 pence per share.“
That’s no guarantee, but it’s positive. There can never be a guarantee with dividends anyway. And a Q3 update did show a $2.6bn fall in assets under management after a $3.9bn net outflow, so there’s clear short-term pressure here.
But these are tough times with many investors shunning risk and buying things like gold. And market optimism will surely return some day, won’t it? It might have already started.
Sunny days
NextEnergy Solar Fund (LSE: NESF) might be the riskiest of the three here, on a forecast 12% yield. It’s an investment trust with a market-cap of only around £400m. The share price is down 30% since IPO in 2014. And all its eggs are in one basket… namely the solar power business in the UK.
In the current political environment, zero-carbon goals are being cast off like old socks. The world is back on its love affair with oil, currently at super-low prices. For now.
But the trust’s been paying steady dividends, rising 11% in 2024 and covered 1.3 times by earnings. Since IPO, a total of £345m’s been paid out. Oh, and it’s buying back its own shares too.
It might be a bit of a gamble, but I reckon all three of these have to be worth serious consideration.
