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There are numerous methods to generate passive income. In the UK, many of us opt for the rent-to-buy approach, which can be profitable. However, my preferred option is investing for dividends.
So, I say disregard renting, and instead, I concentrate on stocks phoenix group (LSE:PHNX).
it FTSE 100 The insurer currently offers an 11.2% dividend yield, positioning it as the most robust dividend payer on the index.
investing for dividends
Investing with the aim of generating income through dividends is often regarded as a simpler and more accessible choice compared to rental real estate for a few crucial reasons.
Firstly, investing in dividend-paying stocks does not necessitate the substantial upfront capital required for property purchase.
In the case of stocks, I can start with modest amounts, thus making this option accessible to a wide range of investors.
Moreover, one does not need to manage properties, tackle tenant issues, or bear the associated costs and time commitments that come with real estate ownership.
In addition, I can open an investment account in just a few minutes. Investing in dividend-paying stocks is incredibly straightforward.
However, it is important to note that investing is not without risks, and diligent research on my investments is necessary.
One reason for Phoenix’s high yield is the decline in its share price. This is partly due to the effect of higher interest rates on the company’s bond holdings.
Insurers manage substantial amounts of capital, which they distribute to policyholders in the form of payments.
These financial obligations must be carefully managed, and leading companies like Phoenix, as well as their peer managed funds, often invest in secure fixed income assets such as bonds.
However, the recent trend of rising interest rates has caused a decline in the value of older bonds and other assets.
Nevertheless, it appears that the situation will improve. Ultimately, interest rates will need to be reduced in the medium term.
Furthermore, these bond losses are ‘unrealized’. In other words, the insurers probably had no intention of selling these bonds. They are held until they mature as part of a diversified portfolio of assets.
Of course, this does not mean that further interest rate hikes will not push stocks lower. Higher interest rates divert money from stocks to debt and cash, in addition to driving down the price of older bonds.
more westerly winds
Secondly, we are also witnessing positive trends in general insurance due to a reduction in inflation. As a result, there is less pressure on insurers to constantly stay ahead of rising claims costs.
This was reinforced by more than doubling long-term cash generation from new business, which amounted to £885 million.
The Group’s performance is also boosted by favorable trends in Bulk Purchase Annuities (BPA). These are insurance contracts in which a pension scheme transfers its liability to make pension payments to an insurance company.
This helps the pension scheme manage its financial risk by ensuring that the insurance company assumes the responsibility of making pension payments to the scheme members.
While Phoenix Group is not the largest player in the BPA market, it is a growing industry projected to be worth £50bn in 2022 and could more than double in the coming years. Currently, only 15% of the UK’s defined benefit pension liabilities have been transferred to insurers.
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James Fox has positions in Phoenix Group Holdings. The Motley Fool UK has no position in any stocks mentioned. The views expressed on the companies mentioned in this article are those of the author and 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 wide variety of insights can make us better investors.
Motley Fool UK 2023