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FTSE 100 dividend shares are having a moment as global investors wake up to what they have to offer. 2025 was the year stock pickers eased their fixation with US mega-tech in search of better value elsewhere. They found it in the UK.
I’m thrilled, because back in 2023 I loaded up my Self-Invested Personal Pension (SIPP) with dirt-cheap passive income stocks such as Lloyds Banking Group, wealth manager M&G and insurer Phoenix Group Holdings (LSE: PHNX).
At the time, they had rock-bottom valuations and sky-high yields. M&G and Phoenix were yielding around 10% a year. Lloyds was offering less, at roughly 5%, but it’s quickly playing catch-up, with its most recent interim payout hiked by 15%.
Brilliant passive growth
Crucially, this hasn’t just been about income. All three have delivered strong capital growth too. The Lloyds share price soared 80% last year, while M&G and Phoenix were both up around 45%. The income came on top of that.
Phoenix in particular has a solid record of dividend growth. It’s increased shareholder payouts for nine years in a row and is expected to do so again in its latest financial year.
Its trailing yield has dipped to 7.27%, thanks to the strong share price recovery, but that’s still good. The board is now targeting modest annual increases of around 2%, which looks sustainable. Phoenix generates at least £300m a year in excess cash, which can be returned to shareholders. While it would suffer in a stock market crash like any other share, broker UBS recently described its balance sheet as “very resilient”, citing management’s focus on hedging interest rate and equity risk.
Nothing is guaranteed, of course. It never is with investing. Phoenix must keep finding new business to sustain cash flows. But with a long-term view, I think it’s well worth considering.
I’m now using dividend shares like these to build a passive income stream. This time it’s through a Stocks and Shares ISA. My retirement is roughly 10 years away. So I’m starting to focus on how much passive income I could realistically build between now and then (on top of what I’ve already assembled).
Investing long-term
I’ve set myself a simple target of £1,000 a month from this new investment stream, or £12,000 a year. I won’t complain if it ends up being more! If I withdraw 5% of my portfolio each year as dividends, I’d need a pot of £240,000 to generate that £12,000 income.
If retirement were 40 years away, hitting that would be relatively easy. Investing £100 a month at 7% annual growth could get me there. With just a decade to go, I need to invest around £1,350 a month, which adds up to £16,200 a year.
That’s a tall order. Still, that’s my target. Building retirement wealth is usually a long-term game. But it can be done over a shorter timeframe if everything is thrown at it. That’s what I’ll have to do, helped by the fact I started my other retirement savings much earlier. Even if I fall short, I’ll be richer for trying. And high-yield UK dividend stocks are a great way to get there.
