The longer I hold dividend shares, the more I appreciate them. Their regular payouts get time to compound and grow, turbo-charging any growth I get if their stock rises too.They can turn a modest holding into a tidy income stream over time, particularly when held in a tax-free Stocks and Shares ISA.
In 2023, I added two of my favourite FTSE 100 income stocks to my Self-Invested Personal Pension: wealth manager M&G (LSE: MNG) and insurer Phoenix Group Holdings (LSE: PHNX). At the time, both offered eye-popping yields of around 10%, far above the FTSE 100 average of 3.25%.
However, that also worried me. Sky-high income is often a sign of a company in trouble, as yields automatically climb when share prices fall. Once payouts hit double digits, sustaining them can be tricky.
Both shares also looked suspiciously cheap, with price-to-earnings ratios under 10, compared with the FTSE 100 average of 17. Was I missing something. I popped them in my SIPP anyway and I’m thrilled I did. Over the past year, shares in M&G and Phoenix are both up roughly 35%. Once I include that yield, my total 12-month return on each stock is around 45%. So far, I’m approximately 60% ahead with dividends reinvested.
M&G is a great high-yielder
Even if their shares idle over the next few years I’ll get my rewards as those mighty dividends land in my SIPP. However, investors who buy today won’t get quite as much income. As their share prices rise, M&G’s yield has slipped to 7.42%, with Phoenix at 7.86%.
Both companies plan to increase shareholder payout regularly, albeit at a modest rate of 2%. In full-year 2025, their forecast yields are 7.57% and 8%, respectively. Now let’s say an income-hungry investor split their entire £20,000 Stocks and Shares ISA allowance between these two stocks.
They’d bag an average yield of 7.79%, which works out as £1,558 of income in year one. Any share price growth they get is on top (the shares might also fall, which won’t be as much fun).
Shareholder payout history
Dividends aren’t guaranteed, but their track record is pretty decent. M&G has increased its dividend every year since floating in 2019, with a five-year annual compound rate of 2.42%.
Phoenix has raised payouts every year for the past nine, with a five-year compound growth rate of 3.17%. Both companies have healthy balance sheets and deep cash reserves, and I think the dividend outlook is positive.
As ever, there are risks. If we get a stock market crash, or lengthy recession, cash flow and dividends could come under pressure. Both need to keep finding new business to keep increase revenues but they operate in a tough sector, with competition from rivals such as Aviva, Legal & General Group and others.
Building a portfolio
Also, I would never suggest investors put their entire portfolio in just two stocks. Especially since these two are both in the financial services sector. Ideally they should diversify across at least a dozen stocks with different profiles, to spread the risks.
While I’ve made a terrific short-term return from these two, the real benefits should come over time. I think both are still worth considering today, mostly for income but with luck some growth as well.
