Up 18% on a 9% yield – are these great income stocks the easiest buys in the UK?

Phoenix Group Holdings (LSE: PHNX) looks set to be the final FTSE100 From what I know, I will be receiving a share of the dividend income for several years.

Phoenix stock was trading at a very low valuation of about six times earnings when I bought it on January 30 and again on March 4. Even better, it was offering a stunning yield of over 10%.

Despite the charm, I was at a loss. Double-digit gains are notoriously fragile. Can this really be sustainable?

Will it be able to continue to finance these dividends?

So I checked again and again, but it really did look like Phoenix could afford to be so generous to shareholders. I was reassured that management had raised payouts in eight of the last 10 years. The increase in 2023 was a modest 2.5%, but given the high starting point, I could live with that.

Phoenix also generated strong free cash flow, with £2bn in full-year 2023. Better still, it secured an impressive £1.5bn of additional long-term cash generation from new business, exceeding its target.

The balance sheet also looked strong, with a Solvency II (SII) surplus of £3.9bn, which pushed SII’s shareholder equity coverage ratio to the upper end of its operating range of 140%-180% at the end of 2023.

Phoenix reported an IFRS loss after tax of £88m, but this was lower than the £2.66bn in 2022 due to lower market volatility. 2024 also started well.

WITH Legal and General Group AND M&G also trading at low valuations while offering sky-high returns, I concluded that this was a sector problem. Investors simply weren’t interested in the financials of the FTSE 100.

There was reason to be cautious. They were hit by recent stock market volatility, which threatened the value of their net assets to cover their liabilities.

FTSE 100 High Yield Star

Plus, higher interest rates meant investors could get decent returns on cash and bonds. So why risk capital? Phoenix operates in a mature and competitive sector, and let’s be honest, its shares will never lose value.

Interest rates have peaked and could fall even lower. That should make today’s ultra-high Phoenix yield of 9.09% look more attractive compared to cash or bonds. At least that’s what I expect, but there are clearly mysterious forces at work here.

I still can’t understand why investors aren’t filling their shoes. Either the market doesn’t understand something or I do.

There are signs, however, that the market is starting to agree with my view. Phoenix shares are up 17.99% over the past six months. On a 12-month basis, they are up 10.34%. That brings the total annual return above 20%. Which is not bad.

Phoenix isn’t that cheap today, trading at 17.43 times earnings. Investors are wary, and any stumble on revenue, new business growth, or dividends will be punished. Still, I’d happily buy more, preferably before the stock goes ex-dividend on September 26. It may not be the most obvious buy, but I just can’t resist its passive income stream.