Down 10% in a month with a 10% yield! Is this stock a no-brainer buy for a second income?

Phoenix Group Holdings (LSE: PHNX) may be a brilliant stock for investors who want to get the maximum amount of second income they can. 

The pensions, savings, and life insurer offers the highest dividend yield on the FTSE 100, currently paying 10.18% a year. Better still, for investors who like a bargain, the Phoenix share price has fallen 10.49% in the last month. That means a lower entry price, higher income.

I bought Phoenix in January and again in March. Should I take this opportunity to make it a hat-trick of purchases?

Stellar FTSE 100 dividend share

I’ve received two generous dividend payments already and the third will hit my account on 31 October. For a while, I was enjoying share price growth as well, but alas, the last month’s sell-off changed that and I’m back where I began.

If today’s yield holds, I’ll double my money in just over seven years. Phoenix has a bit good track record of dividend hikes, as this chart shows.

Chart by TradingView

There’s an obvious problem, though. Will the share price ever grow? And this begs a second question. Does it matter if it doesn’t?

To be fair, Phoenix shares are up 11.14% over the last year. The downside is that they’re down 25.72% over five. That double-digit yield won’t look quite so unmissable if my capital is being eroded at the same time.

At first glance, markets appear to have been hard on Phoenix. In full-year 2023, it delivered a solid 13% increase in IFRS-adjusted operating profit to £617m, driven by strong growth in its pension and savings business.

It appears to start 2024 in a similar vein, posting a 15% increase in first-half adjusted operating profits to £360m on 16 September. However, the company’s accounts are a bit tricky to understand, and the headline bottom line after tax showed a loss of £646m. The board pinned that on “adverse economic variances from higher interest rates and global equities which are the consequence of our SII hedging approach”. Maybe markets aren’t being that hard on Phoenix after all.

I’d like to see the Phoenix share price rise

The dividend still looks solid as total first-half cash generation jumped 5.8% to £950m. Phoenix is now aiming to hit the top end of its £1.4bn to £1.5bn target range in 2024. 

The shares could get a lift with analysts forecasting margins will increase from 5.7% to 13% this year. The 14 analysts offering one-year price targets have a median projection of 575.5p per share, a rise of 11.14% from today’s 517.5p. That’s probably as much as we can hope for, but would give a total return of more than 20%. That’s if it’s correct.

Despite last month’s dip, Phoenix doesn’t look particularly cheap, trading at 15.78 times earnings, roughly in line with the FTSE 100 average price-to-earnings ratio. The price-to-sales ratio is 1.1, which means investors are paying 110p for every £1 in sales. 

The company needs to grow to impress investors, but it’s operating in a mature and competitive market, at an uncertain time. It may struggle to deliver.

I won’t be selling my Phoenix shares, but I won’t buy more today. They offer a brilliant second income, but I’m not convinced I can live by dividends alone.