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I’ve been looking at both Phoenix Group (LSE: PHNX) and M&G (LSE: MNG) shares and I like what I see.
They are in two of my favorite financial sectors right now, both of which have come under the hammer in recent years. A quick look at the stock price charts shows what I mean:
High yields
However, those weak stock prices have done some good for income investors. They have helped boost both dividends to among the highest in the world. FTSE 100.
The expected dividend yield for M&G stands at 9.7%, while Phoenix stands at an even higher 10.6%.
To give us an idea of what that could achieve, the average return on the FTSE 100 for 2023 is around 3.9% at the moment.
Investing £100 a month in a FTSE 100 tracker could return £36,000 over 20 years at that rate (assuming no share price growth and ignoring costs).
By contrast, a 9.7% yield could take that figure to almost £70,000, while 10.6% could bring it closer to £78,000.
Which is better?
So, both potentially lucrative dividends. But the question is which is better?
Well, broker forecasts put M&G on a lower price-to-earnings (P/E) ratio, which I think reflects greater near-term risk.
The asset management company has suffered cash outflows as investors’ pockets dry up. And profits in the coming years should be less than half of what they were in 2020.
And the more we suffer from high interest rates, the more pressure there could be on the dividend.
Insurance risk
Phoenix, by contrast, essentially acquires and manages closed-end pension funds. This isn’t too exciting, but I think it should carry less risk in the short term.
However, the company has been making losses for a couple of years. And this year it will suffer a small loss before returning to profit growth.
Ultimately, I would say we are looking at different risk profiles, but driven by the same financial fears. And I don’t think I see much difference with a long-term vision.
The next years
They have rallied a bit in the past month, but Phoenix stock has fallen this year. In fact, they are down 20% since the start of 2023, while M&G is up 9%.
A 20% drop doesn’t mean the stock can’t fall further. The higher P/E multiple may have been a little overheated and we may be looking at a necessary correction.
After all, Phoenix has been one of the most bought stocks in the UK in 2023, according to AJ Bell. Perhaps a contrarian buy from M&G might be a better choice at the moment?
my verdict
I’ve had both stocks on my watch list in 2023. They’re in two of my favorite long-term businesses, and I rate each of them as arguably the best in their sector.
My problem is that I am quite biased towards financial stocks at the moment, with a bank and an insurance company among my purchases.
Still, when my favorite sectors are down, that’s when I should buy, right? I could easily go for both, but probably M&G first, simply because I don’t own asset manager shares at the moment.
