FTSE 100 savings and retirement business Phoenix Group Holdings (LSE: PHNX) paid a total dividend of 52.65p last year.

On the current £5.18 share price, this yields 10.2% — one of the highest in any major FTSE index.

Returns made from existing savings

So, £9,000 would make £918 of dividends in the first year. Over 10 years on the same average yield this would rise to £9,180, and over 30 years to £27,540.

However, these returns would be much higher if they were used to buy more of the stock – known as ‘dividend compounding’.

Doing this on the same average yield would make £15,851 after 10 years not £9,180, and £180,482 after 30 years rather than £27,540.

Including the initial £9,000 investment, the total value of the Phoenix Group holding would be £189,482. On the same yield, that would pay £19,327 each year in ‘passive’ income — that is, money made with minimal effort.

Returns generated from £0 in the bank

Surprisingly to many perhaps, big passive income can also be made with no existing savings in the bank.

Setting aside just £1 each day (£30 per month) and investing it in the same stock can generate £2,669 in dividends after 10 years. This is also with a 10.2% average yield and dividends being compounded.

After 20 years on the same terms, this would be £16,380, and after 30 years £60,579.

Adding in the £30 each month that has been invested, the total value of the Phoenix Group holding would be £71,379.

This would generate yearly dividend payments of £7,281, or £607 every month by that point!

Reducing the chance of share price losses

Of course, no one wants their dividend gains erased by big share price losses. To lessen the chance of this happening, I only ever invest in stocks that look undervalued.

Phoenix Group trades on the key price-to-sales ratio (P/S) of stock valuation at just 0.2. This is bottom of its competitor group, with an average P/S of 1.4. So, it looks very cheap on that basis.

To find out how much of a bargain it is in cash terms, I ran a discounted cash flow analysis.

This shows the stock to be 33% undervalued at the current price of £5.18. So a fair value for the shares is £7.73, although they might go lower or higher than that.

How does the firm look going forward?

A firm’s dividend and its share price are powered by earnings – so I look for stocks with strong potential here. Again, Phoenix Group seems to fit this bill.

H1 2024 adjusted operating profit jumped 15% on H1 2023 to £360m (versus consensus analysts’ expectations of £348m). Operating cash generation rose 19% to £647m, pushing total cash generation to £950m (against analysts’ forecasts for £739m).

A risk for the firm remains the high degree of competition in the business, which could squeeze its profit margins and dent its yield.

However, as it stands, analysts forecast its earnings will increase each year by a stunning 71.29%, at least to the end of 2026.

They also expect its dividend yield to rise to 10.6% in 2025 and to 10.9% in 2026.

Given its high yield, significant undervaluation, and strong earnings growth potential, I will be buying more Phoenix Group shares very soon.