It’s been a difficult year in the UK energy market. Gas and electricity prices have gone through the roof. The share price of utility group SSE (LSE: SSE) has been unusually volatile, registering big swings up and down.

Earlier this year, investors were expecting bumper profits from utility stocks. But it hasn’t turned out that way. SSE shares are down by 7% so far this year, at the time of writing.

Admittedly, shareholders have received two chunky dividends. But my sums tell me that if I’d invested £1,000 in SSE shares at the start of January, I’d only have £980 today, including dividends.

Does this mean that SSE is a bad investment? Not necessarily.

I think SSE has a solid future. But events this year — and the challenge of working towards net zero — mean that there are still some risks to consider.

Will surging profits trigger a windfall tax?

SSE’s share price tumbled in May after the company reported a 23% increase in profits for the year to 31 March. The government was threatening utilities with a windfall tax, the details of which were unclear.

We still don’t know if utilities will face a windfall tax. But SSE hopes to discourage a tax raid by promising to invest any additional profits it makes from soaring energy prices into network upgrades.

Net zero is another big challenge. SSE is already the UK’s largest renewable generator. But the group plans to invest £2.5bn on energy assets this year, and at least £25bn over the coming decade. I think this level of spending could put pressure on future profits and dividends.

One further risk is that the pricing system for electricity could change. SSE is one of several companies currently talking to the government about new fixed-price contracts. It’s not yet clear how they’d work or what the impact might be on profits.

Bumper profits, but a dividend cut

SSE expects to report adjusted earnings of at least 120p per share this year. That would be a 25% increase on last year’s earnings.

Broker forecasts suggest profits will remain at a similar level over the next couple of years, as the company benefits from hedging arrangements covering future sales.

Despite this strong outlook for profits, SSE is still expected to go ahead with a planned dividend cut next year. The company plans to cut the payout to 60p in 2023/24, down from a forecast level of more than 90p in 2022/23.

I reckon SSE’s falling dividend may be one reason for its weak share price performance. If management go ahead with the cut as previously planned, SSE’s dividend yield will fall from 6% to just 4% next year.

With interest rates rising, I might want more than a 4% income from a slow-growing utility business.

SSE shares: what I’d do

Next year’s planned dividend cut is disappointing, but I think it’s probably the right thing to do. SSE needs to make sure that its dividend is sustainable, even if profits fall and spending rises.

On balance, I think SSE shares are probably priced about right at current levels. I might consider buying the stock as a long-term income investment, but right now I think there are better choices elsewhere.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore 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 diverse range of insights makes us better investors.

At the start of each month, I tend to top up my ISA and think about whether I want to buy any new shares for my portfolio.

This month, I’m considering three FTSE 100 stocks that I think could be great long-term investments.

The UK’s most popular dividend stock?

Lloyds Banking Group (LSE: LLOY) is firing on all cylinders. The bank says its revenue rose 13% to £4.6bn during the third quarter, mainly due to higher interest income.

Rising interest rates could provide a big boost to bank profits, but they also bring a couple of new risks. If bank profits soar while many people are struggling to pay their bills, the government might introduce a windfall tax.

The second risk is that rising rates could trigger a sharp rise in bad debt. Lloyds is the UK’s largest mortgage lender, so it’s exposed to the risk of rising arrears when homeowners are forced onto higher rates.

Lloyds says it hasn’t seen any sign of rising bad debts yet. However, the bank has already accounted for £1bn of expected future losses this year, in recognition of this risk.

A UK recession could hit Lloyds’ profits. But the bank’s balance sheet looks strong to me, and I think the 6% dividend yield looks very safe.

A family-owned business I’d buy

Food and fashion group Associated British Foods (LSE: ABF) owns brands including Primark, Twinings and Kingsmill. The last couple of years have been tough, especially for Primark, which doesn’t sell online.

Profits are still well below the peak levels seen in 2017/18. But ABF went into the pandemic with plenty of cash and minimal debt. This strong financial position has allowed the family-controlled group to orchestrate a strong, planned recovery.

Short-term risks remain. Primark is only just starting to experiment online, but rather from a click & collect perspective than selling direct. High commodity costs and supply chain problem could also continue to cause disruption.

However, I admire the long-term focus of this business, which is still run and controlled by the founding Weston family. ABF shares currently trade in line with their book value, on just 10 times forecast earnings. I reckon the stock looks good value at this level.

An overlooked FTSE 100 stock?

My final pick is FTSE 100 cement and aggregates group CRH (LSE: CRH). This business operates throughout Europe and North America. Its UK operations include building materials company Tarmac.

I’ve tended to overlook CRH over the years. But with the shares down 25% so far this year, I’m starting to think this business could be a good long-term buy.

CRH’s products are essential to many industries, while the company’s size is allowing it to invest in cutting carbon emissions and becoming more sustainable.

This FTSE 100 stock looks reasonably priced to me, with a price-to-earnings ratio of 10. But I think the main risk is that it’s still too early to buy. If the global economy continues to slow, CRH’s earnings (and share price) could fall.

What I’m doing

I’m currently waiting for some cash to arrive in my portfolio from a takeover bid for one of my existing stocks. Until then, I plan to continue researching these stocks.

I think they all have the potential to be good long-term investments at today’s prices.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore 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 diverse range of insights makes us better investors.

BP (LSE: BP) shares are back at pre-pandemic levels, but the oil giant’s dividend has not yet recovered.

CEO Bernard Looney slashed BP’s shareholder payout during the pandemic and has not yet repaired the damage, despite reporting near-record profits this week.

Shares in this FTSE 100 heavyweight have now risen by 35% so far this year. That’s pushed BP’s dividend yield down to 4.2%, which is no better than the FTSE 100 average.

BP has always been a popular choice with UK dividend investors. But are the shares still a best buy for income? Here’s what I think.

A bulletproof dividend?

One thing I’m sure of today is that BP’s dividend looks pretty much bulletproof. City analysts expect this year’s payout to be covered six times by earnings.

That’s unusual for a slow-growing FTSE 100 business. Mature businesses usually pay out a higher proportion of earnings, to reflect their slower growth.

One possibility is that BP is pricing in the expectation of lower oil prices from next year. The latest broker forecasts suggest BP’s earnings will fall by 23% in 2023, as oil prices moderate. However, even then, the forecast payout would still be covered four times by profits.

Why I’m avoiding BP shares

I’ll be open. I’m not buying BP shares. Although I think the company’s dividend looks very safe, I think Looney is laying the groundwork for a less profitable future.

Instead of returning surplus cash to shareholders, he’s using BP’s record profits to repay debt and share buybacks.

I’m all in favour of debt repayment when times are good. But I’m less sure about buybacks. So far this year, BP has announced buybacks totalling $8.5bn. Interestingly, it’s almost exactly equal to BP’s capital expenditure so far this year of $9bn.

That seems remarkable to me. Energy production is a capital-intensive business, but BP is spending almost as much buying back its own shares as it is investing in long-term growth.

For me, the message is clear. Looney isn’t sure what the future holds for BP. But he’s betting that the company may be less profitable than in the past. Buying back shares now will shrink BP’s equity base, reducing the impact of lower profits on shareholders.

I might be wrong

Of course, I could be completely wrong. One concern shared by many people in the energy industry is that the current shortfall in new investment will mean that oil and gas prices stay high for a long time to come.

If that happens, BP shareholders could enjoy very strong results over the coming years.

Personally, I’m not convinced. Right now, the drive for net zero seems to have faded into the background due to concerns about oil and gas supplies. But taking a longer view, I don’t think the picture has changed.

In my view, the transition to renewable energy needs to continue. I suspect that BP knows this, hence its reluctance to invest in new long-term projects.

To sum up, I think BP’s current dividend looks very safe indeed. But I think growth may be limited and believe there are better options elsewhere for income investors.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore 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 diverse range of insights makes us better investors.

Ocado (LSE: OCDO) shares surged more than 30% on Tuesday morning after the retail technology company announced a major new deal with a Korean retailer.

Ocado’s share price has fallen by 60% so far this year, but this sudden surge makes me wonder if the stock has now reached a turning point. Is it time to buy Ocado?

What’s happened?

Ocado’s business model is based on selling its automated warehouse technology to other retailers around the world. The company has just announced its first new deal for a while, with South Korean conglomerate Lotte Group.

Lotte’s business includes supermarkets and department stores with annual sales of nearly £10bn.

The Korean group’s deal with Ocado will see the pair develop a network of customer fulfilment centres (CFCs) in South Korea. These will be powered by the Ocado Smart Platform automation system.

Lotte and Ocado plan to have six CFCs in place by 2028, with the first live in 2025.

Show me the money

So far, Ocado’s international expansion plans have not generated any profit. The company reported a loss of £228m last year and is expected to remain loss-making through to at least 2024.

Ocado’s normal business model is that it funds much of the development of the CFCs. It then expects to collect regular service fees from its customers, once the CFCs are open.

Management says that this model will eventually lead to attractive profits. But we have to take this on trust. So far, the cash just keeps flowing out.

Ocado’s capital expenditure is expected to reach £800m this year, including £400m on building CFCs for customers outside the UK. The company has raised money from shareholders and borrowed from its banks so that it can continue spending.

Management doesn’t expect the business to start generating cash for several more years. But the company now has 16 CFCs live for its customers around the world. More are opening all the time.

My hope is that we’ll start to see revenue flowing from these operations. This might make it easier for investors like me to model how much Ocado shares could be worth.

Bull vs bear

The bull argument for Ocado is that it’s a bit like Amazon was in the early days. Amazon lost money for many years, but eventually became very profitable.

The bearish argument is that by the time Ocado finally starts to generate some cash, most of it will be used up by debt repayments and continued capital expenditure costs.

Ocado has previously claimed that its revenue could rise to more than £6bn in the future, generated underlying profits of perhaps £750m. If that could be achieved, then I suppose the shares could be cheap at current levels.

However, I can see no clear timetable for Ocado to become profitable. For me, it doesn’t make sense to invest in such an uncertain situation.

In my view, there are plenty of good, profitable businesses on sale at attractive prices in today’s stock market. I plan to continue buying such stocks. I’ll be avoiding Ocado shares.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Ocado Group. Views expressed on the companies mentioned in this article are those of the writer and therefore 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 diverse range of insights makes us better investors.

I’m looking for reliable high dividend yield stocks that I can buy to provide a regular second income. Today I want to look at a FTSE stock with a near-7% yield that I think should deliver reliable dividends for many years to come.

Although dividends aren’t guaranteed and are not a substitute for cash savings, this company has paid a rising dividend for more than 20 years. I don’t see any reason why this pattern should change. Indeed, I’ve already invested a small part of my own portfolio in this business.

A defensive choice

The company in question is FTSE 100 tobacco giant British American Tobacco (LSE: BATS). Although this is undoubtedly a sin stock, tobacco is also generally seen as a very defensive business. Consumer purchasing habits remain fairly steady, even during a recession.

BATS’ brands include vaping brand Vuse (the US market leader), as well as well-known cigarette brands such as Dunhill and Lucky Strike. The BATS share price has climbed 30% over the last year as investors have looked for safe haven stocks providing a reliable income.

Despite this gain, BATS still has one of the highest dividend yields in the FTSE 100, with a 2022 forecast yield of 6.9%. Broker forecasts suggest this payout should rise next year, giving a prospective 2023 yield of 7.4%.

How I’d target £200 monthly income

BATS pays a quarterly dividend, dividing its annual payout into four equal amounts. To generate a monthly income, I’d hold my dividends in a savings account and withdraw them gradually each month.

My calculations tell me that I’d need 1,305 shares of BATS stock to achieve my target of a £200 monthly income. That’s based on a share price of 3,360p and would be equivalent to an investment of £34,800.

This is obviously a fairly hefty investment. My plan would be to build up this position gradually, investing cash when possible.

Fortunately, BATS’ high yield means that even a much smaller investment should still produce a useful income for me.

Is BATS’ yield really safe?

For the last 20 years, investors have been predicting that falling smoking rates would put the tobacco industry into decline.

So far, this doesn’t seem to have happened. But I think it’s fair to say that the risk remains in western markets. Ever-tighter regulation and rising pack prices may discourage younger generations from taking up smoking.

However, BATS is working hard to offset this risk by becoming a market leader in so-called reduced-risk products. The company’s Vuse vaping brand is the market leader in the US and is expanding fast in other western markets.

During the first half of 2022, Vuse and other non-combustible products generated around 10% of BAT’s sales. The company expects this division to make a meaningful contribution to the group’s profits by 2025.

Ethical concerns aside, I think British American Tobacco looks like a sensible buy for dividend income.

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Roland Head has positions in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore 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 diverse range of insights makes us better investors.

Tesco (LSE: TSCO) shares have suffered in this year’s market sell off.

The UK’s largest supermarket now offers a 5% dividend yield and trades on a modest 10 times earnings. I think we could see the shares bounce back at some point, perhaps when inflation starts to ease.

If I bought Tesco stock today, how much could I realistically expect to earn over the next five years? I’ve been crunching the numbers to find out. Here’s what I think.

Growth potential?

Tesco currently has a 27% share of the UK grocery market. That means it collects £1 out of every £4 spent on groceries in the UK. Second-place Sainsbury’s is a long way behind, with a market share of 14.7%.

I expect Tesco to remain the UK’s largest supermarket. But I don’t think it will be able to gain much more market share. Despite this, I do expect Tesco to be able to increase its profits over time.

Profit growth could come from some of the group’s other businesses, such as wholesale, mobile, and banking. Profit margins on groceries could also rise if the economic outlook improves and shoppers switch back from cheaper own brands to premium products.

A buying opportunity?

The total investment return from a dividend stock has two elements — dividend income and share price gains (or losses).

Tesco’s dividend last year was 10.9p. I suspect growth will be limited over the next few years as the company tries to maintain dividend growth without paying out more than it can afford.

I’ve assumed average dividend growth of 2.5% each year for the next five years. That would mean I’d receive dividends totalling 57.8p per share over this period. That’s equivalent to a 27% return on today’s share price of 214p.

Of course, I’d also hope to see some share price gains over this period too. One common technique used by analysts to forecast share price growth is to assume that the dividend will increase by the same percentage as the dividend each year.

In my model, this would see Tesco’s share price rising by an average of 2.5% per year — an increase of 13% over five years.

Adding my dividend and share price estimates together gives me a forecast total return of 40% over five years. That’s equivalent to a 7% annualised total return, broadly in line with the long-term average from the UK market.

Tesco shares: a buy today?

Of course, all the numbers I’ve discussed above are only a guess. It’s impossible to predict share price movements and I can’t be sure how Tesco’s dividend will change. Even so, I find this kind of model useful when I’m looking for undervalued shares.

In this case, my feeling is that Tesco looks reasonably valued. In my view, the stock might be slightly cheap, but certainly isn’t a screaming bargain.

I think Tesco’s 5% dividend yield should be pretty reliable over the next few years. But I suspect growth will be limited. For a mix of income and growth, I think there are probably better choices elsewhere.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Sainsbury (J) and Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore 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 diverse range of insights makes us better investors.

Today, I want to look at five FTSE 100 dividend shares I’d buy now to target a passive income of £500 per month.

I’ll also explain how much cash I think I’d need to invest to hit this monthly target.

A safe 8% yield

My first pick is pension and insurance group Legal & General. This is one of the largest financial groups in the UK, with £1.3 trillion of assets under management.

Legal & General has a long track record of above-average profitability and good cash generation. This allows the company to support a generous dividend.

My main worry is L&G’s size and complexity. I can’t really analyse it closely myself. However, the group’s 186-year history gives me confidence that it’s likely to continue to prosper.

After recent falls, L&G shares offer a forecast yield of 8.3%. So this chunky payout looks pretty safe to me.

A cheap consumer stock

Tobacco stock Imperial Brands has risen by more than 30% this year, making it one of the top 10 risers in the FTSE 100. But with a 6.8% dividend yield on offer, I think this sin stock still offers good value.

The ethical and regulatory risks relating to tobacco products mean this investment won’t appeal to everyone. However, Imperial’s performance has improved significantly since chief executive Stefan Bomhard took over in 2020. I think the dividend looks well supported by the company’s earnings and free cash flow.

What else would I buy?

The three other dividend stocks I’ve chosen all offer a yield of around 7%.

Commercial property REIT Land Securities offers a forecast yield of 6.8% and currently trades at a 50% discount to its book value. This partly reflects the risk of falling property prices and rising borrowing costs.

However, Landsec’s accounts look solid enough to me. I think the company’s focus on high-quality London property should protect it from major problems.

I’d also be happy to put some cash into telecoms operator Vodafone. As one of the largest mobile operators in Europe and Africa, this FTSE 100 stalwart generates plenty of cash.

The risk is that Vodafone has to spend a lot too, in order to keep its networks upgraded. Profitability has been disappointing in the past, but is starting to improve. I think Vodafone’s 7.9% yield could be a sensible choice.

Last, but not least, utility giant National Grid looks good to me at under 1,000p. This gives the stock a near-6% yield, with the potential for steady dividend growth.

Profits could come under pressure as National Grid invests in upgrading the UK grid. But its dividend hasn’t been cut for more than 20 years. I think it will remain safe.

How much do I invest for a £500 income?

These five stocks have an average forecast dividend yield of 7.1%. If I invested an equal amount in each one, I’d need about £85,000 to generate an income of £500 per month, or £6,000 per year.

In reality, I can’t invest that much all at once. I’d also probably choose a larger number of stocks to improve diversification. It’s important to remember that dividends are never guaranteed.

The approach I’d take would be to gradually buy shares like these for my portfolio, building my passive income in stages.

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Roland Head has positions in Imperial Brands and Legal & General Group. The Motley Fool UK has recommended Imperial Brands, Landsec, and Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore 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 diverse range of insights makes us better investors.

The THG (LSE: THG) share price has surged 40% higher over the last month. Shares in the online beauty and sports nutrition group are trading just under 60p, as I write, up from a record low of 31p.

THG’s stock bounce appears to have been driven by news that founder and CEO Matthew Moulding has spent £5m buying back shares in the company from Japanese investor Softbank.

The shares are still trading 90% below their IPO level. But I’m wondering if this could be a turning point for THG. Should I consider adding this stock to my portfolio as a recovery play?

The Covid boost is over

THG is on track to report revenue of £2.4bn this year, making it a decent-sized retailer. But while sales rose by 35% in 2021, this year has been slower. The group’s revenue rose by just 8.8% during the first nine months of 2022.

Even this figure was helped by the acquisitions of Cult Beauty and Bentley Labs. Unfortunately, THG’s reporting doesn’t specify how much of its sales have come from acquisitions during the year. However, my guess is that sales would have been broadly flat so far in 2022 without the bought-in growth.

This makes me wonder whether growth at core brands such as Lookfantastic and Myprotein may have peaked.

I’m also a little worried about THG’s ongoing losses. THG is expected to report a pre-tax loss of around £175m this year. Broker forecasts suggest the company will remain loss making until at least 2024.

THG expects to have £500m of cash on hand at the end of the year, so there’s no immediate risk of problems. But most of this money has come from loans that will need to be repaid at some point. At the end of June, the company reported net bank debt of £226m.

THG share price: I’m not buying

Moulding expects 2023 to be a better year. He says that lower commodity prices will allow the business to improve profit margins and cut prices to consumers. This should help to reignite sales growth. Moulding also expects to see consumers “prioritise beauty, health and wellness” despite cost-of-living pressures.

I can’t predict the future success of THG’s brands. For this reason, I’d only want to buy the shares if I thought they were really cheap. Unfortunately, I don’t think they are.

THG is loss making, so the stock doesn’t have a price to earnings ratio. However, an alternative measure I can use is the price to sales ratio.

At a share price of 57p, THG is trading on a price/sales ratio of around 0.3. For comparison, online retailer ASOS is currently valued at just 0.16 times sales, even though the fashion firm is expected to return to profit next year.

On balance, THG stock isn’t cheap enough to interest me at the moment. This business has disappointed the market this year. Although the outlook could improve in 2023, there’s no guarantee of this. I’d want to see firm evidence of improving performance before risking my own cash.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS. Views expressed on the companies mentioned in this article are those of the writer and therefore 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 diverse range of insights makes us better investors.

The Shell (LSE: SHEL) dividend has risen by 50% since 2020. Shell’s share price has doubled over the same period.

High oil and gas prices have allowed CEO Ben van Beurden to ramp up dividend payments after cutting the payout in 2020. However, Shell’s dividend is still only half what it was in 2019.

What’s more, the stock’s forecast dividend yield of 3.9% is less than the 4.1% predicted for the FTSE 100 in 2022.

Shell’s dividend growth is expected to slow from next year. Does it still make sense to buy the shares for income today? Here’s what I think.

Some good news

Shell’s dividend certainly looks very safe to me now. This year’s payout is expected to be covered five times by earnings. That compares to a long-term average of around two times earnings.

The chief executive has also been taking advantage of record profits to cut debt. Shell’s net borrowings have fallen from $79bn in 2019 to less than $50bn at the end of June.

This business has been gushing cash over the last year or so. But I think there are signs that the good times may be coming to an end.

Are profits about to fall?

Shell’s latest quarterly update revealed a sharp change in market conditions in recent months. The company said that a slowdown in demand for plastics meant that its chemicals business was expected to have lost money during the third quarter.

Fears of a recession have also seen petrol and diesel prices fall. Shell says that profit margins at its refineries are expected to have averaged $15 per barrel, down from $28 per barrel during the second quarter. That’s expected to reduce underlying profits by at least $1bn.

Profits from oil production and gas trading are also expected to be lower. Despite record energy costs for consumers, wholesale gas prices have actually fallen recently.

Shell shares: what I’d do now

Despite the global drive to reduce carbon emissions, I don’t think we’ll stop needing fossil fuels any time soon.

In my view, Shell is likely to remain an important part of this business. I think the group’s gas reserves, in particular, could be a great asset as countries gradually transition away from higher-emitting fuels such as coal and oil.

However, I think Shell’s dividend policy tells its own story. The company could afford to pay a much bigger dividend this year. But instead of doing this, Shell is using its spare cash to repay debt and buy back its own shares.

This strategy suggests to me that Shell’s management expect profits to be lower in the future. They may also be preparing the ground for higher levels of investment in new projects, including renewables.

Don’t get me wrong. I think Shell looks fair value at the moment and am confident the dividend will be safe for the foreseeable future. But I don’t see Shell shares as a best buy for income now. I think there are better choices elsewhere for dividend investors today.

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Roland Head has positions in Shell plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore 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 diverse range of insights makes us better investors.

Today, I want to look at a FTSE 100 stock with a dividend of more than 9% that I’d buy for extra income.

Of course, dividends are never guaranteed and can always be cut. But the company in question has a good track record of delivering on its promises and recently reported “record half year 2022 results“.

A 9% FTSE stock I’d buy now

The company I’m looking at is life insurer Phoenix Group (LSE: PHNX). This £5bn business has one of the highest dividend yields on the UK market, with a 2022 forecast yield of 9.4%.

Although very high yields are sometimes a warning sign of problems ahead, in this case I don’t think that’s true. Phoenix’s latest results showed strong cash generation during the first half of the year, with a record level of new business.

In my view, Phoenix’s recent share price slump is simply a sign of the wider market sell off. I don’t expect the firm’s impressive dividend to be cut. Indeed, I think this could be a good time to buy Phoenix shares.

How I’d target £150 monthly income

A monthly income of £150 would be equivalent to £1,800 of dividends each year. Based on the stock’s current forecast yield, my sums suggest I’d need around £19,000 of Phoenix shares.

At the time of writing, Phoenix shares are trading at 538p. That means I’d need 3,559 shares to generate my target income of £150 per month.

Bear in mind that like most UK companies, Phoenix pays dividends every six months, not monthly. To generate a monthly income, I’d have to allow put my dividend cash in a savings account and pay it out gradually.

How safe is this FTSE dividend?

I think Phoenix offers a fairly safe dividend payout. The company’s core business is buying up life insurance policies from other insurers and allowing them to run until completion.

So far, this long-term focus has allowed Phoenix’s management to provide accurate forecasts of the cash that will be generated by the business. As a long-term dividend investor, that seems ideal for my needs.

However, the recent volatility in UK government debt has been a useful reminder of my main worry about Phoenix. I don’t think Phoenix will be too badly affected by recent events. But I think the company’s cash flow forecasts depend on long-term assumptions and some complex calculations.

I can’t realistically check these sums myself. This means I’m relying on the company’s own accountants for future income predictions.

If I buy the shares, I have to accept there’s a risk that unexpected problems in the future could cause a sharp dividend cut.

What I’m doing now

Right now, my share portfolio is pretty much full up. I already own some shares in another life insurer, and I don’t have room for Phoenix.

However, if I was building a new income portfolio today, Phoenix would definitely be on my list of stocks to buy. I think this FTSE 100 insurer looks like a good dividend investment at current levels.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore 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 diverse range of insights makes us better investors.